The RBI has said M&M Financial may continue to carry out recovery or repossession activities through its own employees. What are the implications of this? There could be an impact on the medium-term earnings performance. The NBFC’s asset quality was on a recovery path. With this ban, it may witness an increase in gross non-performing assets (GNPAs) as the pace of recoveries slows down, said a ICICI Direct research note.
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M&M Financial repossesses 4,000 to 5,000 vehicles every month using third-party agencies and its own employees, it said.
The management expects this number to go down temporarily by about 3000 to 4000 per month as the RBI order is implemented immediately. This implies that the RBI’s orders could lead to 75-80% drop-in the repossession activity.
“This could lead to higher loan losses/loss given default till it readjusts its processes. A 5% higher loan loss on assets, where repossession is delayed because of the ban could lift credit cost by 10-15 basis points (annualized)," said analysts from Jefferies India in a report on 23 September. One basis point is 0.01%.
Further, lower perceived risk of repossession could lead to higher slippages, it said.
In another fall out, using own employees for repossession could lead to increased operating expenses. For the September quarter (Q2), the impact of the RBI’s announcement would not be much as the restrictions have come at the end of the quarter. RBI may allow the company to use third-party recovery methods after further investigation into other cases, however, there is no definite timeline, pointed out Akshay Ashok, research analyst at Prabhudas Lilladher.
Against this backdrop, the near-term outlook for the stock appears grim. In a rub-off effect, shares of competitors Shriram Transport Finance Company and Cholamandalam Investment and Finance Company also took a beating, falling by 6.5-9% in the past two days. After considering the latest drop in M&M Financial’s shares, they are still up 15% so far in the current financial year (FY23).
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