Manappuram Finance Share Price: RBI Crackdown On Arm Asirvad Microfinance Triggers Sharp Fall In Stock

The Reserve Bank of India's (RBI) recent crackdown on Asirvad Microfinance, a subsidiary of Manappuram Finance, has sent shockwaves through the market, leading to multiple downgrades from brokerages. On October 17, the RBI took action against four non-banking financial companies (NBFCs) and NBFC-MFIs (Microfinance Institutions) due to "material supervisory concerns," instructing them to halt loan sanctioning and disbursement activities. Alongside Asirvad Microfinance, the other firms affected by the RBI's directive are Arohan Financial Services Ltd, DMI Finance, and Navi Finserv.

The RBI's actions are rooted in concerns regarding the pricing policies of these companies, which were deemed to be in excess and in violation of regulatory standards. For Manappuram Finance, this move has led to immediate and significant repercussions, particularly as its microfinance arm, Asirvad Microfinance, plays a crucial role in its overall revenue generation.

Asirvad Microfinance is a critical subsidiary of Manappuram Finance, focusing on providing microloans to low-income women across the country. The microfinance segment is a significant contributor to Manappuram Finance's revenue, accounting for 27% of its total earnings for FY24. This makes the RBI's action particularly damaging for the gold financier, as it not only affects Asirvad but also threatens to erode investor confidence in the broader Manappuram Finance business model.

In response to the RBI's move, Asirvad Microfinance expressed its focus on addressing the regulatory concerns. The company stated, "We value the feedback provided by the honourable Reserve Bank of India and take on record the improvement areas suggested for Asirvad Microfinance. This matter has been immediately brought to the notice of our board and a meeting has been convened urgently to take immediate action."

Following the RBI's crackdown, several major international brokerages scrambled to revise their outlook on Manappuram Finance, citing the impact on earnings and potential risks to its microfinance subsidiary.

Jefferies was among the first to react, downgrading Manappuram Finance to a 'hold' rating. The brokerage highlighted the potential hit to earnings due to the RBI restrictions, stating, "There are risks of Asirvad needing to raise capital, and the parent company may have to step in with capital infusion if the net worth erodes." Jefferies' cautious outlook reflects the potential long-term challenges Asirvad might face in maintaining profitability amidst tighter regulations.

On the other hand, Bank of America chose to maintain its 'buy' recommendation but significantly cut its target price to Rs 220 per share. The brokerage revised its consolidated earnings forecast downward by 3-6%, factoring in slower asset under management (AUM) growth for Asirvad. "The stock has already de-rated 25% over the last three months, which we believe factors in growth weakness and asset quality deterioration to a large extent," Bank of America noted.

Meanwhile, Morgan Stanley downgraded the stock to 'equal-weight' with a revised target price of Rs 170 per share. The firm slashed its earnings forecast by 30% for FY26-27, warning of potential loan growth moderation, tighter credit practices, and higher provisioning. "Investor sentiment may take a long time to recover, even with the stock's cheap valuations," Morgan Stanley stated.

Adding to the chorus of concerns, JP Morgan also downgraded its outlook on Manappuram Finance's bonds. The brokerage emphasized that the key risk lies in the potential impact on the company's access to funding and borrowing costs. Additionally, any capital infusion required due to asset quality pressures within the microfinance segment could pose further challenges for the firm. This, in turn, could negatively affect the credit ratings for both Asirvad and its parent company.

This is not the first time Manappuram Finance has found itself under the lens of the RBI. Earlier this year, in May, the central bank issued an advisory to both Manappuram and Muthoot Finance, limiting the disbursal of loans in cash. The advisory directed NBFCs to adhere strictly to provisions under the Income Tax Act, particularly those prohibiting cash disbursements exceeding Rs 20,000.

In September, the RBI took further action, ordering gold financiers to review their processes, identify lapses, and implement corrective measures within three months. These steps followed concerns over irregular practices related to loans issued against pledged gold ornaments.

Manappuram Finance's stock has taken a sharp hit following the RBI's action. As of 10:15 am on October 18, the shares were trading down more than 15%, at Rs 149.83 on the National Stock Exchange (NSE). Over the past year, the stock has delivered modest returns of around 25%, but recent regulatory actions are likely to dampen investor enthusiasm moving forward.

*Inputs from Moneycontrol*