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RBI ban on Asirvad due to material supervisory concerns

Expect continued underperformance until the RBI revokes the ban

* The RBI has instructed Asirvad Micro Finance, a subsidiary of Manappuram Finance, to halt the sanctioning and disbursement of loans, effective 21st Oct’24. In addition to Asirvad, the RBI has imposed a similar ban on Arohan Financial Services, DMI Finance, and Navi Finserv.

* The RBI shared that the 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.

* In addition to excessively high pricing, these NBFCs also violated regulatory guidelines on assessing household income and the evaluation of existing or proposed monthly repayment obligations for their microfinance loans. They were also found non-compliant with IRAC norms, leading to loan evergreening, mismanagement of gold loan portfolios, failure to disclose required interest rates and fees, and improper outsourcing of core financial services. It is not clear whether Asirvad was found non-compliant with some or all of these aforesaid observations.

* 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, particularly regarding its pricing policies, risk management, customer service, and grievance handling. Going by precedents in the recent past when the RBI had banned (on specific product lines) particular NBFCs, we believe that this ban on Asirvad could potentially be revoked in six to nine months.

* We cut our FY25/FY26 PAT estimates by ~9%/17% to factor in lower loan growth and lower spreads/margins from the MFI business. We expect a period of continued price underperformance for MGFL until this ban on Asirvad is revoked by the RBI. We downgrade MGFL to Neutral with a TP of INR160 (based on 0.8x Sep’26E P/BV).

Implications for MGFL

* Asirvad contributes ~27% to the consolidated AUM of Manappuram Finance. Asirvad’s AUM stood at ~INR123b as of Jun’24, which included ~INR12b of gold loan portfolio. In addition to microfinance, Asirvad housed ~515 gold loan branches, which will be impacted because of this ban.

* Asirvad’s PAT contribution to the consolidated entity stood at ~21% and ~15% in FY24 and FY23, respectively. Asirvad's net worth stood at ~INR22.5b and MGFL’s standalone net worth stood at ~INR107b as of Jun’24.

* Given that Asirvad has been asked to cease and desist from sanctioning and disbursing all loans, effective 21st Oct’24, we believe this will impact its MFI collections as well. Overall, we believe that the RBI ban will affect Asirvad’s AUM growth (ban on lending operations) and profitability (moderation in spreads).

* We now estimate Asirvad’s AUM to decline ~25% YoY in FY25 (compared to 9% YoY growth expected earlier)

Valuation and view

*  Asirvad’s board has reiterated its unwavering commitment to implementing the RBI’s direction and monitoring the corrective actions in a time-bound plan. In addition, Asirvad’s board 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%/17%.

* We downgrade the stock to Neutral with a revised TP of INR160 (based on 0.8x Sep’26E P/BV).

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