IIFL Finance needs to focus on other verticals as RBI clamps down on gold loan: Experts

Home loan consists of 33 percent of the lender’s portfolio, with gold loan at 30 percent, microfinance at 17 percent, LAP at 11 percent and digital loan at 5 percent.

After the Reserve Bank ban on gold loans, IIFL Finance has to step up its focus on other business verticals in the near future, analysts said.

The RBI had ordered IIFL Finance to stop sanctioning, disbursing, and selling gold loans citing 'material supervisory concerns' in its gold loan portfolio on March 4.

This raised concerns about liquidity among its investors and lenders as gold loans made up nearly a third of its loan assets.

The company on June 15 said a special audit of its books by the regulator was on. In a communication to stock exchanges on June 18, IIFL Finance mentioned the measures it has taken to address the concerns raised by the regulator.

Also read: Gold loan market may feel heat of RBI's action against IIFL Finance, say experts

Based on the audit report, the RBI will now take a call on reviewing the business restrictions imposed on the company. To prevent their recurrence, the board has formed a team to implement corrective actions and revise these deviations and non-compliances, the company said. “The management is confident that these actions will resolve all issues raised by the RBI,” the company said.

Nirmal Jain, founder and managing director of IIFL Finance, recently said that the regulatory action imposing an embargo on fresh gold loans has significantly impacted the business in the last quarter and continues to do so in the current quarter.

“We have used this opportunity to enhance our compliance, control, and operations. We believe that we have fully complied with all regulatory requirements and addressed any deficiencies,” Jain said during the company’s Q4FY24 results.

A senior analyst highlighted that regulatory actions on the company’s gold loan portfolio may affect its earnings. “IIFL Finance has other portfolios under its belt and it should focus more on these after the regulatory eye on its gold loan business,” the analyst said.

Also read: RBI special audit over, necessary measures taken to address regulatory concerns: IIFL Finance

IIFL's business

In FY24, the company’s total gold loan portfolio stood at Rs 23,354 crore, making a 13 percent leap over the previous year. The lender’s gross non-performing asset (GNPA) deteriorated to 3.83 percent in Q4FY24 from 0.80 percent in Q4FY23.

Other than gold, the company has home loans, microfinance, digital loans, loans against property, and construction and real estate finance.

Home loan consists of 33 percent of the lender’s portfolio, with gold loan at 30 percent, microfinance at 17 percent, LAP at 11 percent and digital loan at 5 percent.

RBI’s action

The central bank during an inspection of the company said that the inspection 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.

“The special audit has been completed, and we now await the RBI’s review and expect positive action soon,” Jain said.

In the past few months, the central bank has imposed restrictions on Paytm Payments Bank, IIFL Finance, JM Financial Products, Bajaj Finance, and M&M Finance, and a few more entities.

The banking, non-banking financial services (NBFC) and microfinance (MFI) space are stable, but the RBI is watchful, said Governor Shaktikanta Das in a post-monetary policy press meet earlier this month.

“Overall, the banking, NBFC and MFI sector is stable. Whenever we see any outlier, we make it very clear and engage with them. In the NBFC universe there are 9,500 NBFCs and we have taken supervisory action and restrictions only on three. So therefore, there are no large scale deficiencies in the system, wherever we see deficiency, we engage with the regulated entity to see that necessary regulatory corrective measures are taken, our priority is bilateral engagement with the regulated entity,” Das said.

The stock of the company was trading at Rs 481.40 at 11.24am on June 20, 1.70 percent up.