Shares of gold loan non-banking finance companies (NBFCs) plunged as much as 10 per cent following a drastic fall in gold prices on Monday.

Experts believe further correction in gold prices, if any, could lower the realisable value of collaterals than the majority of outstanding loan amounts, raising possibility of losses.

Jewellery stock too took a hit and fell 3 per cent on an average. Despite this, the industry maintains that the price corrections will not have much impact on their business due to their inventory management system.

Market experts though feel that the slump in investment demand will affect the rapidly expanding chinagembeadsfactory retailers and some also believe that jewellery makers could face huge inventory losses.

Muthoot Finance stock remained weak throughout the session, falling 9.44 per cent in addition to the 13.13 per cent drop in the preceding session, to eventually settle at Rs 118.95.

This was the seventh day of hammering for the stock. Manappuram Finance tumbled 9.77 per cent to Rs 15.70.

Among jewellery stocks, Shree Ganesh Jewellers was down 4.1 per cent, PC Jewellers (6.6 per cent), TBZ (1.3 per cent) and Rajesh Exports (0.6 per cent). Titan Industries, meanwhile, bucked the weak trend and gained 2.45 per cent at Rs 244.65, following a 4.37 per cent drop in the preceding session.

Gold prices saw their biggest intra-day fall since February 28, 1983 on Monday. MCX June futures tumbled 8.20 per cent, while international spot gold prices were down 9.07 per cent on Monday. Some reports suggested that the Reserve Bank of India was also concerned over fall in gold prices.

India Ratings pointed out that in a bid to gain market share, the loan-to-value ratio of gold-loan NBFCs rose as much as 80 per cent of the gold value. Gold has been a hot commodity for many years and rise in gold prices has so far helped these NBFCs to go well beyond the capped LTV ratio of 60 per cent.

“Our assessment is that a sizeable proportion of gold loans outstanding (principal + accrued interest) may already be close to the realisable value of the collateral. Further accrual of interest on them, without cash inflows, may not be prudent given a fair possibility of ultimate reversals,” said Ehsan Syed, director at India Ratings.

It is also expected that refinancing activity in the industry will take a hit, as in the past, it there has been a practice where additional amounts were borrowed against the same collateral in case of rising gold prices.

As far as jewellery makers are concerned, “Most of them replenish their stocks on a day-to-day basis. Replacement of the stocks on the same day when the customer makes the purchase keeps them insulated from the market fluctuations, said Bachhraj Bamalwa, chairman, All-India Gem and Jewellery Trade Federation.

“Most of the bigger jewellers avail gold metal loans to build their inventory. As per the terms of the loan, the stock is bought on credit and the price is fixed as per the date on which the customer purchases the jewellery. So the retailer is able to pass on the price fluctuation fully to the customer,’ said Sanjeev Agarwal, CEO, Gitanjali Export.

According to him, even when the jeweller expands, the inventory in the new stores is managed through this metal credit.

“The small and medium jewellers would be building their inventory on cash. But this happens over a period of several years and only less than 5 per cent of the stocks would have been bought when the prices were up. So the impact of price correction in their business would be less than 5 per cent,” Agarwal said.

However, rating agency Crisil finds that the recent fall in gold prices is expected to cause significant inventory losses and impact margins of gold jewellery retailers and exporters in the June quarter.

“With an inventory holding period of 120 days, domestic gold retailers are expected to see a sharper contraction of 150-200 bps in their operating margins, it said.

Phani Sekhar, fund manager – PMS, Angel Broking believes sales could be affected, especially, for the jewellers who have been trying to establish themselves in newer geographies, paying high rentals and spending heavy on building the brand in the new markets.

The industry though insisted that demand for jewellery would not decline drastically.

“Over the past several years the jewellery demand has been around 550 tonnes per annum, with 5-10 per cent up or down. The investment demand has been growing rapidly from 110 tonnes to around 350 tonnes in the past three-four years. So, we believe that demand for jewellery will remain intact, if not increase due to lower prices,” said Agarwal.