InvestorQ : What are gold loan companies and how do they perform?
Ria Jain made post

What are gold loan companies and how do they perform?

Anu Biswas answered.
3 years ago

Gold has not been a great performer as an asset class over the last 5 years. However, not only have gold loan companies maintained their profitability but the stock prices of these gold loan companies have also performed exceedingly well. There is an interesting comparison of how the two major gold financing companies in India viz. Mannapuram and Muthoot Finance have performed in the stock markets over the last 5 years. The comparison throws up some interesting contrasts. During the last 5 years, Mannapuram returned 141.63% while Muthoot Finance returned 163.10% during the same period. Even if you were to reduce this to a CAGR growth, it quite impressive compared to the Nifty. But during the same period, gold as a metal has hardly given positive returns. This is slightly paradoxical as normally we see the financer of any asset grow along with the asset. That is why gold loan companies can perform even when there is no great bull market support from gold prices.

It needs to be remembered that these gold loan companies also raise funds through deposits which are essentially long term money. By raising long term funds at lower rates and deploying them into short term gold loans, these gold loan companies earn an above-market spread. Of course, one can argue that this will create a maturity mismatch risk, but that is a different debate altogether. The crux of the matter is that the unique nature of gold and the huge arbitrage that the gold loan companies enjoy in terms of margins and spreads gives them the advantage. That is the reason despite tepid gold prices, these gold loan companies continue to remain profitable and enjoy higher stock market returns!