Why Manappuram Finance shares bled 17% today; what's next?

Shares of Manappuram Finance Ltd (MGFL) plunged 17 per cent in Friday's trade as the RBI asked a subsidiary Asirvad Micro Finance to halt the sanctioning and disbursement of loans, effective October 21. In addition to Asirvad, the RBI imposed a similar ban on Arohan Financial Services, DMI Finance, and Navi Finserv. 

Asirvad contributes 27 per cent to the consolidated AUM of Manappuram Finance. Asirvad’s AUM stood at Rs 12,300 crore as of June 30, which included Rs 1,200 crore of gold loan portfolio. In addition to microfinance, Asirvad housed 515 gold loan branches, which will be impacted because of this ban.

Following the development, the stock fell 16.85 per cent to hit a low o Rs 147.50 on BSE.

"Asirvad’s PAT contribution to the consolidated entity stood at 21 per cent and 15 per cent in FY24 and FY23, respectively. Asirvad's net worth stood at Rs 2250 crore and MGFL’s standalone net worth stood at Rs 10700 crore as of June 30," MOFSL said.

The Asirvad board has reiterated its unwavering commitment to implementing the RBI’s direction and monitoring the corrective actions in a time-bound plan. In addition, the Asirvad board said it will do a comprehensive review of the enterprise-wide governance, risk management and regulatory compliance.

"We look forward to engaging with the company management to understand what transpired in RBI audits of Asirvad MFI, what observations have been made by the RBI and what corrective actions the company plans to take. Meanwhile, we believe that this ban could remain in force for six to nine months. We factor in lower loan growth and lower spreads in Asirvad’s MFI
business and cut our FY25/FY26 PAT estimates by 9 per cent/17 per cent," MOFSL said.

The brokerage has downgraded the Manappuram Finance stock to 'Neutral' with a revised target price of Rs 160. 

The RBI decision to ban the lending operations of Asirvad stemmed from major supervisory concerns about its pricing practices, particularly the weighted average lending rate and the interest spread over its cost of funds, which was deemed excessively high and not in compliance with the regulations and the Fair Practices Code issued by the RBI.

Asirvad can continue to service its existing customers and carry out its collection and recovery processes. The RBI would review this ban after Asirvad takes corrective measures to fully comply with regulatory guidelines, MOFSL said.