Investors around the globe are taking a keen interest in the burgeoning gold loan sector, particularly following Bain Capital’s recent move to acquire a stake in Manappuram Finance. This strategic offer, made late Thursday, is set at ₹236 per share, driving the Thrissur-based non-banking financial company (NBFC) to reach a remarkable 52-week high of ₹247.5 during Friday’s trading session.

Significant Transaction Details

The deal values Manappuram Finance at nearly 1.7 times its book value for the fiscal year ending on March 31, 2024. The company’s estimated price-to-earnings (P/E) ratio is approximately 10 times its projected consolidated earnings for FY25. As of the end of December 2024, the NBFC’s consolidated gold loan portfolio has surged to ₹24,500 crore, marking an impressive 18% year-on-year growth. Besides gold loans, Manappuram Finance also offers financing options for small and medium enterprises (SMEs), micro-finance, vehicle loans, and housing finance.

Muthoot Finance’s Performance

In comparison, Muthoot Finance, a larger competitor in the sector, reached a 52-week high of ₹2,444.6 on Thursday, although it saw a slight decline of 0.9% to ₹2,356.3 during Friday’s trading. This Kochi-based NBFC boasts a P/E ratio of around 18 times its projected earnings for FY25, with standalone gold loan assets under management (AUM) totaling ₹92,964 crore at the end of Q3 FY25, reflecting a 34% year-over-year increase. Apart from gold loans, it also provides micro-finance and housing finance.

Market Insights on Gold Loans

As of March 2024, non-banking financial companies (NBFCs) accounted for a substantial 59.9% of the total gold loans disbursed by both banks and NBFCs combined. The net interest margin (NIM) for players in the gold loan market, such as Muthoot Finance, was 5.04% in the December 2024 quarter, down from 7.23% the previous year.

For state-run SBI, the NIM for its domestic operations stood at 3.15%, a slight decrease from 3.34% year-over-year. Similarly, HDFC Bank reported a NIM of 3.62% in December 2024, compared to 3.6% the prior year.

Changing Dynamics in Gold Lending

Gold has long been a favored savings vehicle for Indian households, with estimates suggesting that there are 25,000 to 27,000 tonnes of gold held domestically, valued in the trillions of dollars. As the economy slows and job opportunities diminish, many families are increasingly opting to mortgage their gold with banks and NBFCs to secure funds for business ventures, weddings, or urgent family needs.

This shift has opened up new business avenues for banks and NBFCs, which are now acquiring customers digitally and offering online repayment facilities.

Regulatory Attention and Future Growth

The rapid expansion of gold loans has caught the attention of the Reserve Bank of India (RBI), which expressed concerns in September 2024, urging financial entities to reassess their gold loan policies and practices.

Looking ahead, Manappuram Finance aims to incorporate global best practices from Bain Capital’s portfolio. In February 2025, the company received board approval to raise up to $2 billion (approximately ₹17,000 crore) through the issuance of foreign currency-denominated bonds in multiple tranches.

Conclusion: Market Outlook

As the recent Union budget and repo rate cuts by the RBI aim to spur economic growth and boost loan demand in the banking and NBFC sectors, leading private banks like HDFC Bank are trading at nearly 20 times their estimated standalone earnings for FY25. For investors considering long-term investments in gold lending NBFCs, it may be wise to wait for more favorable valuations before diving in.

With insights from seasoned financial journalist Amriteshwar Mathur, the evolving landscape of gold loans continues to present exciting opportunities and challenges for investors and consumers alike.

Disclaimer: The writer and their dependents do not hold any stocks mentioned in this article. Readers are encouraged to conduct their own research and consult with financial advisors before making investment decisions.