RBI bans Muthoot Fincorp from raising deposits; Muthoot Finance suffers

The Reserve Bank of India (RBI) on Thursday passed an order barring Muthoot Fincorp from collecting deposits in the form of fixed deposits, cumulative deposits and special public deposits from the public.

The RBI said Muthoot Fincorp had been collecting deposits for Muthoot Estate Investments, a group company, via its branches, from which Muthoot Fincorp has now been barred.

The RBI said accepting such deposits is now punishable and if depositors give money, they would be doing so at their own risk. In response, Muthoot Fincorp has announced that it will stop taking deposits immediately, although it will continue to issue bonds and debentures as usual.

“As per section 45-S read with Sec 45-I(c) of the RBI Act, firms are eligible to accept deposits for certain specific , legitimate business purposes including real estate & infrastructure. MEI is primarily engaged in development of hotels, real estate projects and power generation. We would be discussing this with the regulators in the coming days, " it said in a release.

So why have the shares of Muthoot Finance, another group company, fallen almost 4 percent today? Just to be clear, Muthoot Fincorp and Muthoot Finance are two separate companies without any common promoters. Muthoot Fincorp is headed by Thomas John Muthoot, while Muthoot Finance is headed by M G George Muthoot. While the two promoters are family cousins, they have no mutual business relations.

So why have Muthoot Finance’s shares tumbled? Possibly because of investor confusion over which company was actually banned from accepting deposits.

Overall, the increasing clampdown on non-banking finance companies in general and gold loan firms in particular are indicative of growing concerns about their activities on the part of regulators.

In February, the central bank banned Manappuram Finance, another gold loan firm, from accepting any public deposits in a very similarly written order. It also recently issued new capital adequacy and lending norms for gold loan firms.

The gold loan business has become increasingly competitive. Even micro-finance companies and banks are getting into the arena. The new order is another step on the part of the RBI to ensure there is no fiasco as we saw in the case of micro-finance lenders.

To some extent, Muthoot Finance shares may be just be feeling the impact of that cautionary stance of RBI.