Rating agency Standard & Poor’s (S&P) said on Monday that intense competition in India’s gold lending industry could squeeze margins for gold finance companies. However, the market leaders in this segment – Manappuram Finance and Muthoot Finance – are not yet facing refinancing problems.
Intense competition in some relatively safe asset classes will also weigh on the earnings of financial companies. For example, loans backed by gold collateral in India generate strong risk-adjusted margins, attracting many competitors.
The rating agency said short-term borrowing exposes non-bank financial institutions to swings in sentiment.
Some finance companies resort to short-term borrowing, which exposes them to refinancing risk and market volatility.
Among rated financial companies, it rates funding from Muthoot Finance and Manappuram Finance as moderate, largely due to rollover risk. About a third of both companies’ liabilities are short-term.
S&P said a handful of mitigating factors should hold the entities up. They have positive asset-liability management as a large portion of their assets are short-term gold loans. These are short-term (up to one year), self-liquidating and provide a constant source of cash.
They have high levels of equity, at just over a quarter of their total liabilities, and vast liquid assets, around 5-10% of their total assets, he added.
While risk premiums are expected to increase in the Asia-Pacific region, non-bank financial entities with a strong profile and parentage, particularly in India, Japan and Taiwan, will see only a measured increase, the lender said. ‘agency.
Most Asia-Pacific financial companies have benefited from excess liquidity in recent years, and funding costs have fallen sharply for some. With the external turmoil, this liquidity situation could be reversed.
Risk premiums for weaker financial companies or those with perceived governance issues will rise more sharply, S&P observed.