RBI Advisory Triggers Over 8% Drop in Muthoot (MUTHOOT.NS) and Manappuram Finance (MANAPPURAM.NS) Stocks: A Shift in Cash Disbursal Strategy?

• Shares of Muthoot Finance and Manappuram Finance face pressure following an advisory from the Reserve Bank of India (RBI) regarding cash disbursal of loans.
• The RBI has instructed Non-Banking Financial Companies (NBFCs) to adhere to the Income Tax Act, limiting cash disbursement of loans to ₹20,000.
• The directive has impacted lending firms, with Manappuram Finance and Muthoot Finance shares falling 8.3% and 8.8% respectively.

Gold financing companies Muthoot Finance and Manappuram Finance face pressure following an RBI advisory limiting cash disbursal of loans, impacting their stock performance.

RBI Advisory Impacts Gold Financing Companies

The Reserve Bank of India (RBI) has issued an advisory to Non-Banking Financial Companies (NBFCs), instructing them to strictly adhere to the provisions of the Income Tax Act regarding cash disbursement of loans. Specifically, the directive states that NBFCs are not permitted to disburse loan amounts exceeding ₹20,000 in cash. This move aligns with the central bank’s efforts to discourage cash transactions and has affected lending firms, including Muthoot Finance and Manappuram Finance.

Stock Performance of Muthoot Finance and Manappuram Finance

Following the RBI’s directive, shares of Manappuram Finance fell by as much as 8.3% in intra-day deals, while Muthoot Finance shares dropped by up to 8.8%. This has resulted in Manappuram turning negative for the year, while Muthoot is trading up by around 8% on a year-to-date basis. It is worth noting that gold loans formed a significant portion of both companies’ assets under management (AUM), with 84% for Muthoot Finance and 51% for Manappuram Finance as of the December 2023 quarter.

Impact on Gold Financiers

According to Ambit Capital, the RBI’s directive 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.

Conclusion

While the RBI’s directive may lead to operational disruptions for gold financiers, there are sufficient factors to offset this temporary setback. The convenience of gold loans and the competitive advantage of NBFCs over banks are likely to continue driving the market. However, in the short term, both Manappuram and Muthoot Finance may experience a downturn in sentiment.