On March 4, the Reserve Bank of India had imposed a ban on IIFL Finance from onboarding customers for its gold loan business. The ban was lifted on September 19 after an extensive audit process.
In an exclusive interview to Moneycontrol after the RBI lifted the ban on its gold loan business, Nirmal Jain, the co-founder and managing director of IIFL Finance, said the learning of the last six-and-a-half months was that risk can come from anywhere. Also, that compliance norms must be followed, he added.
Speaking extensively about the plans for IIFL going forward, Jain seemed clear that now is not the time for him to go all out on growth. Whatever growth the company can garner within the ambit of strict compliance is what the management would be content with, he said. The lender is also beefing up its teams on compliance, risk management and operations.
Edited excerpts from the interview:
Do you see the RBI ban as the hardest challenge you ever faced in business so far?
Yes, and I became older faster.
What have been the top three learnings from the last six-and-a-half months of hard times?
The first lesson is that you cannot cut corners with compliance. Compliance has to be strictly followed in letter and spirit. Sometimes competition does things in certain ways which is a violation of compliance, and many people end up thinking that it’s some kind of licence or a consent to violate the norms.
The second lesson is that crisis and risk can unfold at any point in time. If someone asks me what is the risk involved with gold loans, given that the asset is stored under two keys and there is a security guard and camera. Then what is the risk? My answer would be that risk can come from anywhere and at any point in time. Fortunately, we had the liquidity, so we could sail through and we had good investors who are backing us.
The third thing is that in the last six-and-a-half months we realised we should not panic. Many times people cut the cost down because there's no business left. There may be a temptation to cut cost, inducing people cost, or cut salaries. But we did neither. Because if you are confident that you want to go and get back, then either of the two options can have worse ramifications.
Fortunately, as we stand today, our people are intact on the ground and our customers are coming back. More than Rs 11,000 crore of money has been paid back to lending partners or banks. For a lending institution, the true test is when you have to liquidate and that was a test for us.
How soon do you expect to recoup the lost business? Is there a growth trajectory you want to spell out?
I do not want to give any forward-looking statement on the growth trajectory right now. I think full compliance is more important. With that whatever growth we can achieve will be achieved. Also, please appreciate that gold (loan) is a short-term product. It will run down fast but it also comes back fast. If we get back to our normal disbursement rate, then the book will fill up very fast. But I can't really do crystal ball gazing, because there's no precedence to this. Never ever has the book run down in this manner. But my intuition is that a short-term kind of product which rotates faster, that is it runs down faster, comes back faster, too.
Are customers coming back to you?
Yes, and they are coming back to us because there's something better we have than others, whether it’s the service or the interest rate.
The trust factor with the customers is intact?
I've been interacting with many customers. I haven’t encountered a case where the trust factor is challenged. There is no case of KYC inadequacies, money laundering or fraud or a direct governance issue or even an asset quality issue. I think everybody understands this.
How did your employees react to the ban?
The first (reaction) was complete shock. There was panic and insecurity on what will happen to their jobs and how long will it take for the ban to be lifted. Significant part of their compensation is variable pay. But most people stuck around. A few months before the ban we had introduced the golden ESOPs scheme, which is exercisable exactly after three years. So that also helped in retaining people. Now, on the hindsight, it (regulatory bans) was happening with so many companies, even some very reputed ones, that most people understood, including the customers, that this can happen to anyone and once corrective action is taken, the ban will be lifted.
Are you ramping up teams after the ban is lifted?
We have ramped up our compliance and to confess, maybe our compliance team was relatively weaker. What has happened is that we just scaled up much faster and the compliance requirements have evolved and grown much. We are ramping up our audit, risk management and operations and MIS teams. These are support functions, which actually are not such a large part of your cost, but there is tendency to cut corners there because it is discretionary cost. But I think that is what is the lesson again - you can't cut corners on compliance.
We would ramp up all these functions. Even things which are not connected with the RBI such as HR and marketing functions we should be ramping up properly.
How did the bankers treat you during the ban?
Public sector banks in particular were very understanding and supportive. They did things in more organised manner (when we were under the ban). They called for a lenders meeting, and said, let them be transparent. They appointed a monitoring agency, with our consent, to track the data flows clearly and how the money is being spent in this kind of crisis. They appointed auditors and became very aggressive in auditing the gold loan. When we do co-lending, one of the fears is that if one customer has been serviced by two banks. So they did audit. The RBI also did its audit. Fortunately, and maybe logically, they did not find even a single problem. The positive of this kind of crisis is that the system stood the trial by fire, and with the banks the confidence has increased.
How soon do you think some of the rating agency actions will get reversed?
What we are doing is that there are small loans, which were rated by CARE and we are repaying those loans so that the CARE rating can be withdrawn. We are doing this immediately, today itself. A few other rating agencies like Crisil have been a lot deeper in understanding. We have not seen a downgrade from these agencies.
What are the plans to diversify your existing loan book by getting into new verticals?
We are evaluating the diversification. Commercial vehicle is a business we had and we sold it. The two-wheeler finance business is synergic with our microfinance, because same set of customers and same channel, network. Auto business is difficult because it needs OEM connect. The vehicles business has many segments such as used cars and new cars. Internally, we will set up a committee to evaluate this.
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