MUMBAI At a Mumbai branch of gold loan provider Manappuram Finance Ltd (MNFL.NS), customer walk-ins have halved in the past week. At another, customers are rushing in to release their pledged gold, expecting further falls in the price of the metal.
Officials at these branches are scrambling to contact customers asking them to pay their dues and, in some cases, top up their collateral after the value of gold tumbled to a more than two-year trough to around $1,321 an ounce.
Manappuram Finance and Muthoot Finance Ltd (MUTT.NS) - two of India's biggest gold pawn companies - now face the risk of a slowdown in their business and, worse, rising bad loans because some borrowers may choose to default and not redeem pledged gold that is now worth less than when the loans were made.
"I had taken a loan about a year back for an emergency. Now, it doesn't make sense to pay up the outstanding dues," said 41-year-old Tamanna Gowda, who pawned his wife's gold bangles to draw a loan of 60,000 rupees when the yellow metal was hovering above $1,790 an ounce.
India is the biggest importer of gold in the world. Jewellery made of the metal is an essential part of the dowry Indian parents give to their daughters at weddings.
Just two months back, customers got about 2,300 rupees for each gram of gold pledged with pawn shops. Now, the value has fallen to about 1,800 rupees.
Concerns that there could be many more potential defaulters like Gowda have made investors jittery and prompted ratings agency ICRA to lower its outlook on Manappuram and Muthoot to "negative" from "stable".
Analysts contacted by Reuters expect 18-20 percent of gold loan firms' books to be under pressure as the metal skids.
Manappuram has warned that defaulting borrowers would force it to report a quarterly loss, but Muthoot remains optimistic and does not expect the slump to affect its business model.
At Muthoot, loans that were 90 days or more past due more than doubled to over 7 percent of its total book at the end of March from a year earlier. At Manappuram the figure ballooned to 9.4 from 2.4 percent over the same period, according to ICRA.
Indian banks and other finance companies, which have small gold-loan portfolios, are also raising collateral demand at their branches, senior bank executives said.
"We have to be prepared for further drops," K. Venkatraman, CEO of private sector lender Karur Vysya Bank (KARU.NS), told Reuters. Gold loans account for a quarter of its total assets.
"We may ask some customers to make part-payments where margins are very low. We have issued circulars to our branches that if there is need they can go after specific customers."
Both Manappuram and Muthoot have grown rapidly. As recently as the fourth quarter of 2011, gold loan companies were offering to lend $100 against jewellery valued at just $110, and their net profits surged handsomely that year.
The Reserve Bank of India acted to contain the risks last year. It asked banks to cut exposure to companies that lend against gold in a bid to increase surveillance of such firms and check excessive lending against the metal. It also barred such companies from making loans exceeding 60 percent of the value of gold jewellery held as collateral.
Most analysts rate Muthoot and Manappuram as a "buy" or "strong buy", according to Thomson Reuters data. Morgan Stanley Investment Management, Reliance Capital and Goldman Sachs Asset Management were among investors in either of these companies at the end of last month, according to fund tracker Value Research.
But, as gold started tumbling this week, nervous investors bailed out of both firms. Muthoot shares fell to their lowest in nearly a year and rival Manappuram's shares hit a new low.
"A few of our customers who haven't paid their dues are unlikely to do so now. It doesn't make economic sense anymore," said a branch manager at Manappuram's central Mumbai outlet.
The CEO of Manappuram, which expects a loss in the March quarter due to bad loan growth, was not reachable for a comment.
By contrast, Muthoot Finance does not expect any impact on its profitability, George Muthoot, managing director of Muthoot Finance, told Reuters in an email reply to questions.
"Considering our long-term relationships, the concerns over wilful defaults seems far-fetched. There is a genuine demand for gold loans and we continue to stay optimistic about our growth prospects," he said.
However, investors are unlikely to return soon to a market overshadowed by fears of central bank sales and slow global growth.
"The view on gold does not suggest that it will bounce back in a hurry, so there is no compelling reason to look at these stocks," said Sudhakar Shanbhag, chief investment officer of Kotak Mahindra Old Mutual Life Insurance Ltd, which recently sold its exposure in these companies.
(Additional reporting by Nishant Kumar in HONG KONG; Editing by John Chalmers and Sanjeev Miglani)