SHARES in one of India's biggest gold lending companies fell by a third to a nine-month low this week, after the company warned of potential losses resulting from falls in the gold price.
Manappuram Finance, which offers loans that use gold as collateral, said this week that it may lose some of the interest owed on its loan book of more than Rs100 billion ($1.8billion) as falls in the gold price have lowered collateral value, Bloomberg reports.
In particular, the collateral on some Rs15 billion of loans made towards the end of 2011 may not be adequate to cover the interest owed to lender should borrowers fall behind on payments, Manappuram said in an exchange filing.
Dollar gold prices are down more than 15% from the record high hit in 2011.
"Everyone knew that there are significant slippages in the gold loan business but 15% of disbursements turning bad has alarmed investors," says Nidhesh Jain, analyst at Espirito Santo Securities in Mumbai.
Jain added that "corporate governance is a bigger concern for the stock" following allegations, denied by the company, that it chose to disclose the information to selected parties before announcing it to the market. Bank of America Merrill Lynch has downgraded Manappuram from 'buy' to 'underperform'.
India's central bank last year ordered gold lenders to raise their levels of capital provision while also capping their loan-to-value ratio at 60%. At the time, Manappuram's managing director said asset growth was likely to be flat as a result.
"Fundraising for lending is anyway constrained for these gold loan companies," said Vibha Batra, senior vice president at ICRA Ratings in New Delhi following this week's announcement.
"If the asset quality also declines, then there is a negative equity sentiment, which might make incremental funding harder."
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