In a series of regulatory actions, the Reserve Bank of India (RBI) has issued directives affecting various financial entities. Following its move to prohibit Paytm Payments Bank from accepting new deposits and credit transactions in January, the RBI has now instructed IIFL Finance to cease offering gold loans due to significant supervisory concerns, as of March 4. Subsequently, on the following day, the RBI imposed restrictions on JM Financial, preventing the company from extending loans against shares and debentures, citing deficiencies in its loan processing procedures.
RBI’s Recent Moves Against NBFCs Trigger Sector Caution; Continued Stock Volatility Predicted, Banking Stocks May Reap Rewards, Experts Note.
In a February Interview with Moneycontrol, Hiren Ved, Director and CIO of Alchemy Capital, likened RBI’s regulatory actions on financial companies to the ‘US FDA moment for Indian financials.’ He emphasized that the crackdown would influence investor sentiment towards the banking and financial sector.
In 2014, the US Food and Drug Administration (FDA) initiated a crackdown on Indian pharmaceutical companies supplying generic drugs to the US, citing numerous violations. Hiren Ved likened this regulatory intervention to the ongoing situation with RBI’s actions against financial entities, noting that such measures led to prolonged impacts on the businesses of pharmaceutical players.
Following RBI’s move to bar Paytm Payments Bank from accepting new deposits and credit transactions in January, the regulatory body directed IIFL Finance to halt gold loans due to significant supervisory concerns on March 4. The subsequent day, RBI restricted JM Financial from offering loans against shares and debentures, citing deficiencies in the company’s loan processing procedures.
Over the past year, shares of Non-Banking Financial Companies (NBFCs) have surged by more than 30 percent, fueled by robust growth in Assets Under Management (AUM) and sustained high Net Interest Margins (NIM). Stocks such as JM Financial, Muthoot Finance, Manappuram Finance, Cholamandalam Finance and Investment have experienced rallies ranging between 30 and 50 percent over the past year. IIFL Finance also saw a significant uptick of nearly 38 percent in its stock price before experiencing a recent downturn in the last two trading sessions.
However, the consecutive regulatory actions against NBFC entities have led to a decline in investor sentiment towards the sector. Jignesh Shial, Director of Research and Head of BFSI Sector at Incred Capital, expressed concerns that these actions would make investors in the NBFC sector jittery in the short term, as they become apprehensive about potential exposures to regulatory scrutiny.
In a recent note on the sector, Emkay Global also highlighted that the RBI’s punitive measures would impact systemic growth for NBFCs in the near term.
Ashish Goel, Managing Partner and CEO of InvestSavvy, echoed similar sentiments, stating that the regulatory actions would negatively affect the perception of NBFCs among investors. With consecutive actions taken against entities like Paytm, IIFL, and JM Financial, investors are expected to approach the sector with caution.
Ashish Goel emphasized the impact of regulatory actions on investor behavior, stating that incidents like the one involving JM Financial could create a ripple effect, causing investors to shy away from stocks like Manappuram Finance due to fear of similar repercussions, even if they are not directly impacted.
A common thread among the regulatory actions taken by the RBI is regulatory non-compliance within the banking and NBFC ecosystem. Goel noted that the RBI is targeting companies operating on the outskirts of compliance, sending a clear message to NBFCs to exercise caution in their business operations.
Emkay Global echoed similar sentiments in their note, suggesting that the RBI’s actions reflect a zero-tolerance approach towards recurring regulatory non-compliance and misgovernance.
In this scenario, banks are poised to benefit as they are subject to stricter regulations compared to NBFCs. Goel predicted that some of the businesses affected by regulatory scrutiny might transition to banks in one form or another.
On March 6, the stock prices of NBFCs such as Aditya Birla Capital, L&T Finance Holdings, and Manappuram Finance experienced significant declines of 5-7 percent, while shares of Kotak Mahindra Bank, Axis Bank, and ICICI Bank rose by 1-2 percent during the trading session.
Despite the short-term market turbulence, the stringent enforcement of regulations is deemed beneficial for the long-term health of the sector. Jignesh Shial expressed optimism about the tightening of systems and processes, highlighting that shareholders ultimately bear the brunt of risky loans turning into Non-Performing Assets (NPAs).
Shial also cited examples of how RBI’s actions have prompted banks to improve their processes. For instance, in 2020, HDFC Bank was barred from issuing new credit cards and digital products due to regulatory concerns identified by the RBI. However, HDFC Bank was given time to rectify the issues, ultimately emerging from the ordeal with enhanced compliance measures.
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