Synopsis: The shares of Manappuram Finance Ltd (MGFL) experienced a sharp decline of 17% following the Reserve Bank of India's (RBI) decision to halt the loan disbursement operations of its subsidiary, Asirvad Microfinance, which contributes significantly to the company's consolidated assets. The ban, which took effect on October 21, raises concerns over compliance with regulatory standards and the Fair Practices Code related to pricing and interest rates.
On Friday, Manappuram Finance Ltd (MGFL) saw its stock price nosedive by 17% after the Reserve Bank of India (RBI) ordered its subsidiary, Asirvad Microfinance, to cease lending operations temporarily.
This directive, effective from October 21, 2024, has sparked investor concerns and led to a steep selloff in the company’s shares, which plunged to Rs. 147.50 on the Bombay Stock Exchange (BSE).
Asirvad Microfinance, which had been preparing for an initial public offering (IPO), plays a significant role in Manappuram's business portfolio, contributing 27% to its consolidated assets under management (AUM).
As of June 30, 2024, Asirvad’s AUM stood at Rs. 12,300 crore, of which Rs. 1,200 crore comprised its gold loan portfolio.
In addition to microfinance, Asirvad operates 515 gold loan branches that are now also affected by the ban.
The RBI’s decision was prompted by concerns over Asirvad’s lending practices, particularly its weighted average lending rate and the excessive interest spread relative to its cost of funds.
These pricing practices were found to be non-compliant with RBI regulations, particularly the Fair Practices Code.
This regulatory intervention also impacted other financial firms like Arohan Financial Services, DMI Finance, and Navi Finserv.
While Asirvad is prohibited from disbursing new loans, it is allowed to service its existing customers by continuing collection and recovery processes.
The RBI will lift the ban only after Asirvad takes corrective measures to address compliance issues and aligns its operations with regulatory standards.
According to MOFSL (Motilal Oswal Financial Services Ltd), the ban could be in effect for up to six to nine months, depending on how quickly corrective measures are implemented.
The negative sentiment around Asirvad’s compliance issues has led to MOFSL revising its FY25 and FY26 profit after tax (PAT) estimates for Manappuram Finance by 9% and 17%, respectively.
As a result, MOFSL downgraded Manappuram Finance's stock to 'Neutral,' setting a revised target price of Rs. 160 per share.
The board of Asirvad has expressed its commitment to following the RBI’s directives and ensuring a comprehensive review of its governance and risk management practices.
This development is a significant blow to Manappuram Finance, which acquired Asirvad in 2015 and has since seen it grow into a major contributor to the company's profitability.
In FY24, Asirvad accounted for 21% of the company's total profit, while in FY23, it contributed 15%.
The ban has raised concerns about the future growth prospects of Manappuram Finance and its subsidiary.
The IPO plans for Asirvad Microfinance, initially set to raise Rs. 1,500 crore, have now been delayed further as a result of the regulatory intervention.
In conclusion, the RBI’s stringent action against Asirvad Microfinance over non-compliance with lending regulations has had a domino effect on its parent company, Manappuram Finance.
With the subsidiary contributing significantly to the overall revenue and assets of the company, this ban raises serious concerns about the impact on growth, market performance, and investor confidence in the near term.
How quickly Asirvad rectifies its regulatory lapses will be critical in determining the duration of the ban and the financial recovery of both the subsidiary and its parent company.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Readers are encouraged to seek professional guidance from a qualified financial advisor before making any investment decisions.
