shares of Manappuram Finance plummeted by 15% following the Reserve Bank of India’s (RBI) decisive action against its subsidiary, Asirvad Micro Finance. This regulatory move has raised significant concerns among investors regarding the future performance of Manappuram Finance, which heavily relies on its microfinance operations.
Main Points
RBI’s Action Against Asirvad Micro Finance
The RBI’s directive came as a response to serious supervisory concerns regarding Asirvad Micro Finance and three other non-banking financial companies (NBFCs): Arohan Financial Services, DMI Finance, and Navi Finserv. The central bank ordered these entities to cease and desist from sanctioning and disbursing loans effective from October 21, 2024. The RBI cited excessive pricing policies and non-compliance with regulatory guidelines as the primary reasons for this action. Specifically, the Weighted Average Lending Rate (WALR) and interest spreads charged by these companies were deemed excessively high and not in line with established regulations.
Impact on Manappuram Finance
Asirvad Micro Finance is a crucial part of Manappuram Finance’s business model, contributing approximately 27% to its total revenues. The sudden halt in loan disbursements is expected to have a material impact on the parent company’s earnings. Following the RBI’s announcement, shares of Manappuram Finance dropped to their lower circuit limit, indicating a rush to sell among investors.
Brokerages reacted swiftly to the news, with several firms downgrading their ratings for Manappuram Finance. Jefferies reduced its rating to “hold” with a target price of ₹167 per share, suggesting that the restrictions would significantly hurt earnings. Morgan Stanley also downgraded its rating to “equal weight” and cut its target price from ₹262 to ₹170 per share, predicting a decline in profitability due to rising funding costs and potential capital infusion needs from the parent company.
Reasons Behind RBI’s Decision
The RBI’s decision was not made lightly; it followed a series of warnings issued over the past months regarding fair lending practices. The central bank had previously emphasized the need for NBFCs to adopt a “compliance first” culture. Despite these warnings, Asirvad Micro Finance and its peers continued practices that led to concerns about usurious lending rates and inadequate assessment of borrowers’ repayment capabilities.
In addition to pricing issues, the RBI found violations related to household income assessments and loan classification norms. These findings included evidence of “evergreening” loans—extending new loans to pay off existing ones—which is considered a risky practice in microfinance lending.
Market Reactions
The immediate market reaction was stark. On October 18, shares of Manappuram Finance fell sharply as investors digested the implications of the RBI’s actions. Analysts noted that this downturn reflects broader concerns about the company’s ability to maintain growth in light of regulatory pressures. While some brokerages maintained a “buy” rating on the stock due to its historical performance in gold financing, they acknowledged that earnings forecasts would need adjustments given the current circumstances.
Future Outlook
Looking ahead, the future remains uncertain for both Manappuram Finance and Asirvad Micro Finance. The RBI’s restrictions will remain in place until the companies demonstrate compliance with regulatory guidelines and address the highlighted deficiencies in their operations. This could take several months, during which time investor confidence may continue to waver.
Asirvad Micro Finance has acknowledged the RBI’s feedback and stated that it would convene an urgent board meeting to address these issues promptly. However, whether these measures will be sufficient to restore investor confidence remains to be seen.
Disclaimer: The information given in this article is from investment experts and brokerage companies, they do not represent Local Haryana. Before taking any investment related decision, you must consult a certified expert.
