Lenders await clarity from RBI, IIFL Finance before reviewing co-lending deals

The NBFC has co-lending partnerships with public and private sector banks like State Bank of India (SBI), ICICI Bank, Punjab National Bank, Canara Bank, DCB Bank, Union Bank of India, Central Bank of India, etc.

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Among the outcomes of the Reserve Bank of India (RBI) strictures against IIFL Finance is the fact that at least a few lenders that have co-lending deals with the non-banking financial company (NBFC) are awaiting clarity from the regulator and the company before taking their next steps.

Under a co-lending process, banks or other institutions partner with a other banks and institutions to widen their pool of borrowers. 

Three officials from different organisations who spoke to Moneycontrol said the lenders are on a wait-and-watch mode after the Reserve Bank of India (RBI) on March 4 barred IIFL Finance from sanctioning and disbursing fresh loans against pledged gold and jewellery or gold loans as they are called following material supervisory concerns.

“We are relooking at our business with IIFL Finance. We are aware of the developments and are waiting for any clarity,” a senior executive of a bank said, on condition of anonymity.

Another executive, who too declined to be named, said that they would first have to see how things pan out. “We are on a wait-and-watch approach on our deal with them. We currently see no risk but we are cautious,” the executive said.

IIFL Finance had not responded to queries sent by Moneycontrol at the time of publishing this article.

Also read: Concerns over asset quality, risk management may have prompted RBI's crackdown on NBFCs: Experts

IIFL co-lending partnerships

The NBFC has co-lending partnerships with public and private sector banks like State Bank of India (SBI), ICICI Bank, Punjab National Bank, Canara Bank, DCB Bank, Union Bank of India, Central Bank of India, etc.

IIFL Finance’s total gold loan portfolio in the October-December quarter of financial year (FY) 2023-24 stood at Rs 24,692 crore. The gold loan portfolio constituted 32 percent of the company's total assets under management (AUM) in the quarter. The portfolio yield stood at 19 percent, as per the company's investor presentation. In the same quarter, of the total gross non-performing assets (NPA) ratio, gold loans' ratio stood at 0.8.

RBI action

The RBI, on March 4, asked IIFL Finance to stop sanctioning or disbursing gold loans with immediate effect after observing certain material 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," RBI said in a media release.

Explaining the action, the central bank said an inspection of the
company was carried out by the RBI with reference to its financial position as of March 31, 2023, which raised the concerns about the oversight of the company's gold loan portfolio.

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.

IIFL Finance in a clarification on the RBI's action 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."

On its part, DCB Bank, one of IIFL Finance's partner banks, 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 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.