RBI Ordered IIFL Finance To Halt Gold Loan Operations

Shares of gold mortgage lenders Manappuram Finance Ltd and Muthoot Finance Ltd saw significant gains on March 5 following the RBI’s imposition of restrictions on IIFL Finance over concerns about its gold loan portfolio. Manappuram Finance’s stock recorded its biggest single-day gain since September 2020, while Muthoot Finance surged the most since June 2020.

Gold’s Rise: A Boon for Lenders

Lenders benefit from rising gold prices through:

• Stronger collateral: Increased gold value provides a bigger buffer if borrowers default.
• Potentially lower interest rates: Increased security allows lenders to potentially demand lower returns.
• Improved loan-to-value ratio: Lenders can offer larger loans for the same gold, attracting more borrowers.

IIFL Finance’s Plight

In contrast, IIFL Finance shares hit the 20% lower circuit after the RBI’s announcement. The central bank noted serious deviations in the assaying and certifying purity and net weight of gold by IIFL Finance, both during loan sanctioning and auction upon default.

Reassurance from IIFL Finance

Despite the setback, IIFL Finance reassured investors during a conference call that the impact on near-term profitability won’t be significant. The company stated that the RBI’s report did not raise concerns about governance or KYC-AML issues. It also emphasized that its recovery process remains unaffected, with no embargo on auctioning gold for recovery purposes.

RBI Directive Hits IIFL Finance

The Reserve Bank of India (RBI) has directed IIFL Finance Ltd to immediately halt all activities related to sanctioning or disbursing gold loans, as well as any assignments, securitizations, or sales of its existing gold loan portfolio. This directive, issued under Section 45L(1)(b) of the Reserve Bank of India Act, 1934, comes in response to material supervisory concerns regarding the company’s gold loan portfolio.

IIFL Finance’s Growth and Reach in the Gold Loan Segment

Despite the directive, IIFL Finance has shown strong growth in its gold loan portfolio, which expanded by 35% year-on-year to reach Rs 24,692 crore in the October-December quarter. The company offers gold loans in 2,721 towns/cities across 25 states and four Union Territories, catering to a diverse customer base including salaried individuals, self-employed individuals, and MSMEs.

Impact and Way Forward

This development is a major setback for IIFL Finance, as gold loans constitute 32% of its Asset Under Management (AUM) mix. However, since the issues are process-related, the company can work with the regulator to rectify the observations. The duration for which the ban will remain in effect is uncertain, making it difficult to quantify its impact on IIFL’s AUM growth and profitability.

Estimates 

It is estimated that IIFL Finance’s EPS impact could exceed 25-30%, highlighting the significant challenge the company faces in overcoming this setback.

Conclusion

The RBI’s restrictions on IIFL Finance have had a mixed impact on the market, with other gold loan lenders benefiting from the development. While IIFL Finance works to address the regulatory concerns, investors will closely monitor the company’s actions and the RBI’s future directives in this regard.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.