The formal business of “loan against gold” is almost 11 years old now and most of us now have a fair understanding of the business drivers and the associated cyclicality. But it’s always useful to revisit these drivers before analyzing the current context. Below are the five most important drivers.

Indians' love for bank deposits knows no bounds! Deposits are comfortable, convenient and worry-free. They are also “by default” i.e. if your money is not invested, it is automatically lying in your bank account. Currently, over Rs. 200 lac crores are placed with banks in deposits!

The history of stock markets is replete with wealth creation stories that involve "improved capital allocation". We have seen that with ITC, when it stopped investing in non-related businesses & improved dividend payouts; Usha Martin, when is sold the loss-making steel plant to Tata Steel, Heritage Foods, after it sold the loss-making retail venture. The events that have unfolded at JM Financial over the past 5 months suggest that it could well be at the cusp of such transformation.

Humanity’s fascination with silver is as old as that for gold i.e. 4,500 years and it has also been assigned the status of “distant cousin of gold”. Over the past six months, the outlook for gold has substantially improved and gold prices made new life time highs in all major global currency terms (Our Nov’23 note on gold https://greenedgewealth.com/gold-time-to-rise-shine/). The obvious question for an investor would be that if gold has started doing well, can silver be far behind?

For any form of asset-backed financing, the trend in underlying asset prices serves either as tailwind or headwind. When the asset prices are strong, the financier enjoys good growth, operating leverage and negligible NPAs. When the asset prices decline, the reverse is true. The property price boom of 2006-16 benefited the housing finance companies, the gold price boom of 2018-20 benefited the gold loan companies and the truck price boom of 2020-23 benefited the vehicle finance companies.

Humanity’s fascination with gold is 4,500 years old. Current opinions &emotions about gold swing from it being an unproductive investment with no cashflows, to being a store of value, to being a hedge against inflation & human madness, to being a measure of wealth, to being an investment avenue, to being a bet against the declining dominance of USD and so on. While all of the above arguments hold some water, it was the last opinion that caught our attention and called for more analy...

The rally in PSU Banks that started with SBI in 2021, was strengthened by BoB & Canara & Union Bank in 2022, and then furthered by long tail of PNB, Bank of India, IDBI, UCO, Central Bank and IOB in 2023. While the rally in most cases has been backed by improving earnings delivery, there is an ancient investing rule that subtly reminds us “when the strongest rally is witnessed in the weakest pockets of the sector, it is time to re-assess the merit of the rally and its future prospects” ...

Microfinance – Upcycle set to get stronger! Microfinance (MFI) & 2W finance were the worst impacted amongst the various segments of BFSI sector. While 2W finance is still struggling to recover, the recovery in MFI sector started sometime in mid of 2022 and the Q3FY23 results & commentaries of various players suggest that the momentum is set to get stronger. The current macro & micro set-up for the MFI sector can be termed as the “goldilocks situation” due to the following rea...

Microfinance – Cyclical recovery is underway! Cyclicality in microfinance sector is as old as the sector itself. A good cycle usually lasts for few years and is inevitably followed by bad cycle. The sector witnessed its worst cycle over 2019-21 courtesy the build-up that happened over 2017-19 and the disruptions caused by the pandemic. Over the past two years, most MFI players have provided for or written-off around 10-20% of their portfolios. Credit losses of MFI players ...

Gold price & gold loan NBFCs – Is the correlation breaking down? All through the last 10 years, there has been a simple linkage between gold price and the perception of performance of gold loan NBFCs. If gold prices went up, stocks of gold loan NBFCs like Muthoot & Manappuram would do well and vice-versa if the prices went down. This simple correlation was based on the understanding that if gold prices go up, loan growth improves, operating leverage kicks-in, auctions reduce and profitabili...

Gold loans: The “Titan” moment for Muthoot Finance Q1FY22 represented a perfect storm for the gold loan sector. Gold prices had crashed 15% towards the end of Q4FY21, lock-downs had impacted demand as well as ability of customers of earn & repay, and banks had to deal with additional problem of lowering LTVs from 83% to 68%. It was no surprise that most players witnessed de-growth in loan book, rise in NPAs and subdued profitability for the quarter. Tough times generally separate the men ...

It was refreshing to meet some old friends outside a popular sandwich joint; especially after being home confined for almost 7 months. An unsaid ritual of sorts, I was asked for a “stock tip”. This time, I shared that ‘Gold’ seems attractive for the next few years. On expected lines, one of them quickly retorted “Markets are on steroids, so many stocks are flying up 5% & 10% daily. Of all the stocks in the world, you want us to buy gold, which is already at Rs. 50,000!”. Surely, a lot...

Exasperated of being confined to home since Covid-19 outbreak, Mr. Kapoor & family finally decided to take a break and drive down from Mumbai to Khandala, a popular weekend getaway. While driving through Mumbai, his eyes fell on the glittering office buildings, first at the Bandra Kurla Complex (BKC) and later at Airoli/Ghansoli. A simple thought crossed his mind: “This work from home (WFH) trend would have reduced the property prices here too. Once Covid is over, these offices will o...

Fixed Deposits – Something’s Surely Not Fixed! Like many Indians, Sonali prefers to park most of her savings in bank fixed deposits (FDs). She is well aware that due to the safe nature of FDs, the returns on them are low. Yet, she was in for a surprise when she had to renew one of her maturing FD, and could hardly believe that long term FDs were just yielding ~5.0%, the lowest in her lifetime. What’s happening today has happened before! Most of us do know that post-Covid, Central Bank a...