Shares of Manappuram Finance, a leading gold financing company, tumbled by 15% on Friday, October 18, reaching an 11-month low of ₹150.73 per share. This sharp decline was triggered by the Reserve Bank of India's (RBI) regulatory action against its microfinance subsidiary, Asirvad Micro Finance, and subsequent downgrades by major financial analysts.
On Thursday, October 17, the RBI imposed a ban on four non-banking financial companies (NBFCs), including Asirvad Micro Finance, Arohan Financial Services, DMI Finance, and Navi Finserv. These restrictions prohibit the NBFCs from sanctioning or disbursing loans, effective from the close of business on October 21, 2024. The move came in response to concerns over excessive pricing practices by these companies, which were found to charge significantly higher markups than their cost of funds.
The central bank’s investigation uncovered that these NBFCs failed to comply with pricing regulations and had disregarded guidelines concerning the evaluation of borrowers' incomes and their ability to repay loans. Additionally, the RBI noted a lack of transparency in disclosing interest rates and fees, as well as repeated loan renewals that breached lending norms.
Asirvad Micro Finance, which accounts for 27% of Manappuram Finance’s consolidated assets under management (AUM), is set to face significant challenges following the RBI’s directive. This has raised concerns over the company’s future growth prospects, leading to a sharp drop in its share price.
Financial analysts responded to the RBI’s action with downgrades for Manappuram Finance.
Morgan Stanley downgraded the stock to Equal Weight (EW), reducing its target price to ₹170. The firm cut consolidated earnings forecasts for Manappuram Finance by 20% for FY25 and 30% for FY26-27, citing the expected hit to profits from the restrictions placed on Asirvad Micro Finance. Despite the standalone business appearing attractive, Morgan Stanley believes it may take time for investor interest to recover.
Jefferies also downgraded the stock to 'Hold' and lowered its target price to ₹167. It noted that the ban on Asirvad, which is a major growth driver for Manappuram Finance, would likely hinder the company’s future performance. Jefferies revised its earnings per share (EPS) estimates downwards by 11-19% for FY25-27. However, it pointed out that with the stock trading at 0.9x FY26E book value, the potential downside may be limited.
The RBI’s action reflects broader concerns over the practices of NBFCs in India, particularly their aggressive pursuit of growth while chasing high returns on equity. RBI Governor Shaktikanta Das had previously warned that such behavior could pose risks to financial stability.
Despite prior warnings from the RBI, several NBFCs continued to engage in practices that resulted in excessive pricing, lack of transparency, and potential exploitation of small borrowers. The RBI’s ban emphasizes the need for responsible pricing strategies, particularly in the microfinance sector, where the focus is on providing financial inclusion to low-income households.
The regulatory crackdown on Asirvad Micro Finance and other NBFCs has had a profound impact on Manappuram Finance’s stock price, driving it to an 11-month low. With analysts revising their outlooks and reducing earnings forecasts, it remains to be seen how the company will navigate this challenging period.
Key Takeaways:
This significant development highlights the importance of regulatory compliance and transparent business practices for companies operating in India’s NBFC sector.
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