NBFC crisis sparks gold rush for some lenders in India

By Divya Patil and Anto Antony Bloomberg

As the shakeout in India’s credit market shows few signs of abating, one group of financiers is benefiting from the turmoil: shadow banks that provide loans in exchange for gold.

In a country deeply attached to the precious metal, whose people stockpile more gold than citizens of any other country, borrowers are increasingly pawning their family jewelry to get cash amid a fundraising crunch. That’s helped double the share price in the past year of Manappuram Finance, one such firm, while the stock of Muthoot Finance, the country’s largest cash-for-gold lender, has jumped 49%. Those financiers’ bonds are also in demand at a time when investors are shunning debt from other shadow banks, which are struggling from lack of funds and credit downgrades.

More than half of the loans from these lenders get repaid in less than six months, providing firms with a steady stream of cash to pay off their own debt and thus avoiding a so-called asset-liability mismatch. The recent rise in gold prices is also a boon. Indian households have almost $1 trillion worth of gold, and the nation is the biggest buyer of the metal after China.

“Shorter tenure of our loans helps to keep a check on asset-liability mismatches while a rise in the gold prices will help in keeping a check on asset quality too,” said V P Nandakumar, the chief executive officer of Manappuram Finance, in an interview. “Both equity and credit markets are looking favorably at non-bank lenders with robust business models who have got both these pieces right.”