The banking regulator is looking into the ₹150-crore KYC lapse that was disclosed by Mahindra and Mahindra Financial Services on Tuesday. According to highly placed sources aware of the matter, the RBI could impose some sort of curbs on the non-lender with respect to acquisition of new businesses. Whether these curbs would have a pan-India impact on the business or would be restricted to certain branches isn’t clear yet.

“The nature of restrictions that could be imposed will depend on the outcome of initial investigation of the matter,” said a person with knowledge of the development. Email sent to M&M Finance and RBI on this matter remained unanswered till press time.

KYC lapses

On Tuesday morning, when India’s second largest vehicle financier was slated to announce March quarter results, M&M Finance in a filing to stock exchanges said that a fraud with respect to retail vehicle loans was uncovered in one of its branches in North-East region. The fraud involved forgery of KYC (know your customer) documents leading to embezzlement of company funds. The magnitude of the fraud, according to the company, is expected to be not more than ₹150 crore.

“Investigations are underway and necessary corrective actions have been identified and are at various stages of implementation, including arrest of few people involved,” the company said in its filings. Area business manager and other employees of the branch concerned are said to be the persons involved in the fraud. The issue has also been reported to RBI’s central fraud monitoring cell. It is pertinent to note that in September 2022, the RBI asked M&M Finance to cease recovery or repossession of assets from borrowers though outsourcing arrangements citing material supervisory concerns. 

Financial implications 

East India accounts for 11 per cent of the lender’s total advances, or ₹10,273 crore of total loans, per M&M Finance’s December quarter investor presentation. The company’s total loan book stood at ₹93,392 crore as on December 31, 2023. While the exact proportion of business originating from North-East cannot be ascertained from the investor presentation, sources say the amount involved in fraud is material to the business originating from the region. 

Suresh Ganapathy, Managing Director and head of financial services research, Macquarie Capital, pegs 15 per cent decline in profit before tax assuming that the company takes account of the same in March FY24 quarter. “From a qualitative perspective, we believe issues such as regulatory non-compliance or fraud inhibit re-rating as investor confidence takes a hit,” he added.

Stock of M&M Finance declined by 5.47 per cent to close at ₹263.6 on Tuesday, reacting to the development.