Implications for investors: Should you invest in stocks like Manappuram Finance?

Manappuram Finance shares saw a sharp decline of 15% on Friday following the Reserve Bank of India's (RBI) decision to impose restrictions on its subsidiary, Asirvad Micro Finance. The stock was trading at ₹150.73 on the National Stock Exchange (NSE) and ₹150.8 on the Bombay Stock Exchange (BSE), down nearly 15% from the previous day's closing price.

RBI restrictions on Asirvad Micro Finance and other NBFCs

The RBI's directive came on Thursday, ordering Asirvad Micro Finance and three other non-banking financial companies (NBFCs) – Sachin Bansal's Navi Finserv, Arohan Financial Services, and DMI Finance Private – to halt the sanction and disbursement of loans. The action is set to take effect from the close of business on 21 October. The decision was based on material supervisory concerns, particularly regarding the pricing policies of these companies, which involved usurious lending practices.

The central bank cited issues with the Weighted Average Lending Rate (WALR) and the interest spread charged over the cost of funds, which it found to be excessively high and not in compliance with the existing regulations. As a result, the affected NBFCs must immediately cease disbursing new loans.

Impact on Manappuram Finance share price

The regulatory crackdown led to a significant impact on Manappuram Finance's stock, causing a 15% drop in the share price. The development sent shockwaves through the market, as investors became cautious due to the uncertainty surrounding the company's loan book and the potential impact on its future earnings.

The sudden decline presents an opportunity for those looking to invest in stocks. Still, investors must assess the risks associated with regulatory actions and potential changes in the company's lending strategy.

Manappuram Finance's response to RBI's action

In response to the RBI's directive, Manappuram Finance acknowledged the regulator's feedback and emphasised its commitment to making the necessary improvements. The company stated that the board had taken note of the incident and convened a meeting to discuss immediate corrective measures.

The board reiterated its commitment to comply with the RBI's directives, focusing on implementing the necessary changes promptly while maintaining a "compliance first" culture. It also assured investors and customers that steps would be taken to ensure continued and robust customer service.

Implications for investors: Should you invest in stocks like Manappuram Finance?

The situation raises questions about whether now is the right time to invest in stocks such as Manappuram Finance. The regulatory action against its subsidiary could affect its loan disbursement capabilities in the near term, potentially impacting revenue growth. However, the company's proactive response and commitment to aligning with regulatory norms might help restore investor confidence in the long run.

Before deciding to invest in stocks, potential investors should consider the broader implications of the RBI's stance on excessive interest rates among NBFCs and microfinance institutions. Regulatory risks are always a factor to consider when assessing financial stocks, and understanding the company's plans to address these concerns will be vital.

Broader market implications: Regulatory risks in NBFCs

The RBI's action against Asirvad Micro Finance and other NBFCs underscores the importance of regulatory compliance in the sector. It serves as a reminder to investors about the potential risks associated with financial stocks, particularly in the microfinance space. When considering whether to invest in stocks of NBFCs, it is essential to evaluate the regulatory landscape and how companies manage compliance.

The broader market reaction to the RBI's directive reflects growing concerns over the financial health and governance standards of microfinance institutions. This development may prompt other companies in the sector to reassess their lending practices to avoid similar regulatory scrutiny.

Conclusion

The 15% drop in Manappuram Finance's share price following the RBI's restrictions on Asirvad Micro Finance highlights the sensitivity of financial stocks to regulatory actions. While this may present a buying opportunity for those looking to invest in stocks, caution is advised, given the potential for further regulatory changes in the NBFC sector. Investors should closely monitor how the company addresses the RBI's concerns and the broader implications for the microfinance industry.

In light of these developments, investing in financial stocks like Manappuram Finance requires a thorough understanding of regulatory risks and the company's approach to compliance.