Loan recovery line pushes M&M Financial shares lower

Shares of Mahindra & Mahindra Financial Services Ltd (M&M Financial) are on a downward spiral. Investor sentiment towards the stock soured after the Reserve Bank of India (RBI) last week ordered it to immediately cease recovery and repossession activities through agreements outsourcing. Shares of the non-bank financial corporation (NBFC) fell another nearly 6% on Monday, extending losses from Friday. With that, in the past two days, the stock is down 18%.

The RBI said M&M Financial may continue to carry out salvage or repossession activities through its own employees. What are the consequences of this? There could be an impact on earnings performance in the medium term. NBFC’s asset quality was on the road to recovery. With this ban, it could see an increase in gross non-performing assets (GNPA) as the pace of recoveries slows, according to a research note from ICICI Direct.

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M&M Financial takes back 4,000 to 5,000 vehicles each month using third-party agencies and its own employees, he said.

Management expects this number to temporarily decrease by approximately 3,000 to 4,000 per month as the RBI order is implemented immediately. This implies that the RBI orders could result in a 75-80% drop in repossession activity.

“This could result in higher loan losses / loss given default until it readjusts its processes. A 5% higher loan loss on assets, where repossession is delayed due to the ban, could increase the cost of credit by 10 to 15 basis points (annualized), “said analysts at Jefferies India in a report from September 23. One basis point equals 0.01%.

Also, a perceived lower risk of repossession could lead to larger slippages, he said.

In another downfall, using its own employees for repossession could lead to increased operating expenses. For the September quarter (Q2), the impact of the RBI announcement would not be material as the restrictions came in 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 specific timeline, said Akshay Ashok, research analyst at Prabhudas Lilladher.

Against this backdrop, the stock’s short-term outlook looks bleak. In a friction effect, shares of rivals Shriram Transport Finance Company and Cholamandalam Investment and Finance Company also took a beating, falling 6.5-9% over the past two days. After factoring in the latest drop in M&M Financial shares, they are still up 15% so far in the current financial year (FY23).

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