Will debt damage Manappuram? A post-RBI peek at the numbers

The Reserve Bank of India (RBI) has put the brakes on one of the fastest growing sectors in the finance industry. In a release late Monday evening, the central bank restricted Manappuram Finance,which provides loans using gold as collateral, and sole proprietary firm Manappuram Agro Farms, from accepting deposits from the public.

Following the RBI notice, shares of Manapurram Finance's took a major beating on Tuesday and crashed by over 13 percent to Rs 50 in morning trades.

Following the RBI notice, shares of Manapurram Finance's took a major beating on Tuesday and crashed by over 13 percent.AFP

The RBI says it has come to its notice that Manappuram Finance has been accepting deposits from the public in its branches and offices but has been issuing deposit receipts in the name of Manappuram Agro Farms, a sole proprietary concern of its Executive Chairman VP Nandakumar.

The most worrying factor about the firm's financials is that instead of repaying matured deposits, fixed deposit receipts are being issued in the name of the sole proprietary firm. In other words deposits are being rolled over.

The RBI says that acceptance of deposits from the public in Manappuram Agro, which is an unincorporated body, is prohibited.

Manappuram Finance, in a release to the stock exchanges, said that it is only taking non-convertible debentures, which is not a 'public deposit' in the company.The board will also discuss measures to improve its corporate governance at a meeting scheduled for 10 February, the company said in a statement. It is, however, silent on the role of Manappuram Agro and also the fact that its branches are being used to collect deposits.

As per the latest quarterly results, the company has retail borrowing to the tune of Rs 640.4 crore, which has shot up by 105 percent from 31 March 2011, when the borrowing was Rs 311.5 crore. The company's financials show that its growth has been mostly through debt financing, which isstretchingits balance-sheet. Tier 1 Capital (shareholder equity and disclosed reserves) has fallen from 32.29 percent in December 2010 to 18.37 percent in December 2011.

Despite the company borrowing at a feverish pace its business is not keeping pace. Take, for example, its income, which has grown by 110 percent between December 2010 and December 2011 to Rs 726.4 crore, whereas interest outgo has increased by 207 percent from Rs 96.3 crore to Rs 296.4 crore.

With RBI now raising questions over the way the company is raising funds, the cracks in the strain financials are now becoming visible. Little wonder then that the stock has fallen 13 percent.