Muthoot, Manappuram Finance fall over 8% on RBI's advisory on cash disbursal; here's what it means for gold financiers

Shares of Muthoot Finance and Manappuram Finance fell after RBI advisory on cash disbursement limits for NBFCs.

Shares of gold financing companies – Muthoot Finance, and Manappuram Finance – were trading under pressure on Thursday after the Reserve Bank of India (RBI) sent the companies an advisory concerning cash disbursal of loans.

The RBI has instructed Non-Banking Financial Companies (NBFCs) to strictly follow the provisions of the Income Tax Act regarding cash disbursement of loans. Specifically, NBFCs are not allowed to disburse loan amounts exceeding ₹20,000 in cash. This directive was issued after some large gold loan-providing NBFCs sought clarification from the RBI regarding cash disbursals.

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The move aligns with the central bank’s efforts to discourage cash transactions, although the rule itself is not new. However, the stricter enforcement by the central bank has affected lending firms. Earlier this year, in March, the RBI barred IIFL Finance from disbursing gold loans due to violations of cash disbursal norms and other issues.

Manappuram Finance stock fell as much as 8.3 percent in intra-day deals today to its low of ₹180.10. Meanwhile, Muthoot Finance lost as much as 8.8 percent to fall to ₹1,510. After the recent drop, the Manappuram has turned negative for the year, while Muthoot is trading up by around 8 percent on a year-to-date basis.

It is worth noting that gold loans formed 84 percent of Muthoot Finance’s assets under management (AUM) and 51 percent of Manappuram’s as of the December 2023 quarter.

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What does this mean for gold financiers?

According to Ambit Capital, the RBI’s directive on cash disbursement of loans may pose challenges for NBFCs that focus on small-ticket loans in rural areas, such as microfinance institutions (MFIs) and gold loan providers. These NBFCs often rely heavily on cash disbursements, and the new rules may temporarily impact their operations and asset under management growth.

However, NBFCs that have already transitioned to digital disbursements through investments in technology and processes are likely to experience minimal impact. Ambit Capital notes that gold loan NBFCs, particularly Muthoot Finance, may face some effects from the directive. Nonetheless, the brokerage expects the impact on Muthoot to be mitigated by higher gold prices and market share gains resulting from the gold loan ban on IIFL Finance.

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While there may be operational disruptions as NBFCs shift small-ticket customers to digital disbursements, Ambit believes there are sufficient factors to offset this temporary setback. The firm highlights the difficulty of replacing the convenience of gold loans and asserts that NBFCs should maintain their competitive advantage over banks. Ambit Capital reiterated its ‘buy’ recommendation on Muthoot Finance with a target price of ₹1,808 per share.

Echoing a similar view, Morgan Stanley noted that while 40 percent of Manappuram’s disbursements are conducted in cash and about 56 percent of its gold loan business occurs online, around 40 percent of Muthoot’s gold loans are transacted online. This situation may lead to near-term negative sentiment for both Manappuram and Muthoot Finance.

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The brokerage anticipates that Manappuram’s stock may perform better than Muthoot’s due to its relatively lower exposure to gold loans. The firm believes that gold financiers will need to implement operational changes following the recent directive.

While it expects some transient financial impact, it does not foresee significant delays in transaction times as necessary processes are already established. Nonetheless, both Manappuram and Muthoot Finance may experience a short-term downturn in sentiment.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.