Shares of IIFL Finance Ltd. are down in a 20 per cent lower circuit on Tuesday after the Reserve Bank of India imposed restrictions on further sanctions and disbursements of gold loans.
Following the development, the stock fell 20 per cent to hit a low of Rs 478.50 on BSE.
This is the biggest single-day drop for the company since its demerger in 2019. In May 2019, IIFL had demerged IIFL Wealth Management and IIFL Securities from IIFL Finance to create three different entities.
In an analyst call held earlier this morning, IIFL Finance’s management said that the number of customer complaints that have gone to the Reserve Bank of India with regards to the gold loan are very few. They further added that they have requested for a meeting with the central bank today itself.
Reserve Bank of India’s concerns were received by the company in January and they are taking corrective actions, the management said during the earnings call.
However, the management also clarified that there will be no impact on the company’s recovery process and there is no embargo on the auction of gold for recovery either. There were also no governance issues or KYC issues in RNBI’s report.
Motilal Oswal Securities called it a major negative setback for IIFL, as gold loans constitute 32 per cent of its AUM mix and a large proportion of co-lending done by the NBFC was in the gold loan segment.
“Since these are process-related lapses, the company can work with the regulator to rectify its observations in the gold loan portfolio. Given that there is little clarity on the duration for which this ban could remain in effect, it is difficult to quantify the impact of this ban on IIFL’s AUM growth and profitability. We may look to revise our estimates after the conference call hosted by the IIFL management on March 5,” Motilal Oswal Securties said.
Motilal Oswal, however, noted that the RBI has allowed IIFL Finance to service its existing gold loan portfolio through the usual collection and recovery processes.
“The RBI also shared the findings of an inspection that it carried out into the company’s financial position as of March 2023. The regulator found certain material supervisory concerns in IIFL’s gold loan portfolio, including: Serious deviations in gold appraisal and certification of purity and net weight of gold at the time of sanctioning of gold loans and at the time of auction upon default,” it said.
Besides, the RBI found breaches in loan-to-value (LTV) ratio; significant cash disbursements and collections (far in excess of the statutory limit); non-adherence to the standard auction process anda lack of transparency in charges being levied on customer accounts.
“The regulator also shared that it was engaged with the company’s senior management team and statutory auditors over the last few months. However, since no meaningful corrective action was forthcoming, it necessitated the imposition of business restrictions with immediate effect to safeguard the interests of customers,” Motilal Oswal said.
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