The Reserve Bank of India (RBI) stopping IIFL Finance from giving fresh gold loans may lead to a slowdown in the gold loan market, said experts. They highlighted that since IIFL is a big player in the market with tie-ups with several public and private sector banks, traditional gold loan lenders will relook at their compliance and regulatory processes.
"IIFL Finance is a major gold loan lender with co-lending partnerships with banks. Post this, other traditional gold loan lenders will relook at their compliance and operational practices which may affect the growth in the short term," said Varun Sharma, co-founder, NBFC Advisory.
Additionally, experts said that IIFL Finance’s co-lending deal with banks will be something to watch out for. DCB Bank, one of the co-lending partners of IIFL Finance, after the regulatory action, said that its co-lending portfolio has been "satisfactory" with the lender following a due-diligence process.
“The bank has co-lending relationships with NBFCs (non-banking financial companies) beginning May 2021. The Bank’s Gold Loan co-lending arrangement with IIFL Finance Limited has been in existence since August 2021. As of now, our portfolio performance has been satisfactory. We have a due diligence process to give us a reasonable assurance on the co-lending portfolio,” DCB Bank said in a statement on March 4.
On this, Sharat Chandra, co-founder, India Blockchain Forum, said: “Co-lending contagion effect can't be ruled out. It would be interesting to examine the exposure of banks in IIFL's loan portfolio.”
Apart from DCB Bank, IIFL Finance has co-lending deals with State Bank of India, ICICI Bank, Canara Bank, Punjab National Bank, Union Bank of India, Central Bank of India, among others.
RBI action
The central bank on March 4 asked IIFL Finance to stop sanctioning or disbursing gold loans with immediate effect, mentioning "supervisory concerns" in the company's gold loan portfolio.
"The Reserve Bank of India has today, in exercise of its powers under Section 45L(1)(b) of the Reserve Bank of India Act, 1934, directed IIFL Finance Ltd. to cease and desist, with immediate effect, from sanctioning or disbursing gold loans or assigning/ securitising/ selling any of its gold loans," the central bank said in a press release. Explaining the action, it said an inspection of the company was carried out with reference to its financial position as of March 31, 2023, which revealed certain material supervisory concerns in the gold loan portfolio of the company.
These include serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default, breaches in loan-to-value ratio (LTV) and significant disbursal and collection of loan amount in cash far in excess of the statutory limit, among others, the RBI said
Issuing a clarification on the action, IIFL Finance said, "We reaffirm our commitment to rectify observations of the RBI in the gold loan portfolio to comply with RBI findings at the earliest and will continue with our endeavour to provide gold loan services in the overall interest of customers."
The central bank said that over the last few months, it has been engaging with the senior management and the statutory auditors of the company on these deficiencies. "However, no meaningful corrective action has been evidenced so far. This has necessitated the imposition of business restrictions with immediate effect, in the overall interest of customers," the RBI statement added.
The company can, however, continue to service its existing gold loan portfolio through its usual collection and recovery processes, the RBI said. The supervisory restrictions will be reviewed upon completion of a special audit to be instituted by the RBI and after rectification by the company of the special audit findings and the findings of RBI Inspection, to the satisfaction of RBI, it added.
IIFL's business
The NBFC's total gold loan portfolio in the October-December quarter stood at Rs 24,692 crore. The company provides gold loans in 2,721 towns/cities across 25 states and four Union Territories to the salaried, self-employed, and micro, small and medium enterprises customer segments.
The gold loan portfolio constituted 32 percent of the company's total assets under management (AUM) in the October-December quarter. The portfolio yield stood at 19 percent, as per company's investor presentation.
In the same quarter, of the total gross non-performing assets (NPA) ratio, gold loans' ratio stood at 0.80 percent as on December 31, 2023. The company's net profit in the third quarter rose 30 percent year-on-year to Rs 490.4 crore.
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