This lesson was one of the thousands in the Ameri-can author’s book of life instructions, which, if our bankers had read, would have done great service to this country. While growth is important, risk assessment is vital. While asset quality is important, determining loss in case of a default is vital. While NIM is important, risk adjusted yield is vital.
It may be a cliché, nonetheless true, that anyone can lend but not everyone recovers. This is where risk management plays an important role in any lending business. For instance, in the gold-loan business, a company would have to closely assess the quality of gold and price fluctuations, both are major risk parameters. While the first is objective, insulating against the latter requires a nuanced strategy. That’s why we like Manappuram Finance, a company that has smartly introduced an additional protection measure by shortening the tenure of loans to three months compared to industry practice of one year. Thus, it protects the lender from sharp vagaries of price fluctuations. It’s no wonder then that its gross NPA rose above 1% only in one out of the past five years, which was the year of demonetisation.
From FY08 to FY12, its gold loans grew at a scorching pace with AUM increasing ~15x on the back of rising gold prices. Over the consequent five years, the industry underwent a consolidation, primarily due to stagnant gold prices and regulatory interventions. But now that the players have adjusted to the new norms, the industry is expected to grow at 8-10% rate for the foreseeable future.
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April 10, 2020