IIFL Finance shares: The Reserve Bank of India (RBI) ordered the NBFC to cease authorizing and disbursing gold loans with immediate effect in an order dated March 4. This led to the shares of IIFL Finance Ltd. being locked at the 20% lower circuit limit in Tuesday’s trade. As a result of the event, the stock dropped 20% and closed at Rs 478.50 on the BSE.
Given that gold loans account for 32% of IIFL’s total assets under management (AUM) and that a sizable amount of the NBFC’s co-lending was in the gold loan market, Motilal Oswal Securities described it as a significant negative setback for the company.
“The business can collaborate with the regulator to address its findings in the gold loan portfolio, as these are errors related to the processes. It is challenging to calculate the impact of this ban on IIFL’s AUM growth and profitability because it is unclear how long the prohibition may last. Following the March 5 conference call led by the IIFL management, we might look to update our estimates,” Motilal Oswal Securities stated.
However, Motilal Oswal pointed out that IIFL Finance is able to service its current gold loan portfolio using the customary procedures for collection and recovery because of the RBI’s approval.
“An examination of the company’s financial status as of March 2023 yielded findings, which the RBI also released. When sanctioning gold loans and holding an auction after default, the regulator discovered some significant supervisory issues with IIFL’s gold loan portfolio. These issues included: Serious deviations in the appraisal of gold and the certification of purity and net weight of gold.
In addition, the RBI discovered violations of the loan-to-value (LTV) ratio, large cash disbursements and collections that exceed the statutory limit, disregard for the established auction procedure, and a lack of openness regarding the fees assessed on customer accounts.
Additionally, the regulator disclosed that during the previous few months, it had interactions with both the company’s senior management group and statutory auditors. To protect the interests of consumers, however, business restrictions had to be imposed immediately because there was no sign of any significant corrective action, according to Motilal Oswal.
The company will undergo a special audit conducted by the RBI. Once the company has satisfactorily addressed the issues raised by the RBI inspection and special audit, the regulator will reevaluate its ban on gold lending.
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