Shares of gold mortgage lenders Manappuram Finance Ltd and Muthoot Finance Ltd rallied up to 14 percent on March 5 after the RBI slapped restrictions on rival IIFL Finance over material supervisory concerns in its gold loan portfolio.
The IIFL Finance shares reacted to the central bank move and hit the 20 percent lower circuit on March 5. Manappuram Finance, on the other hand, recorded the biggest single-day gain since September 2020 on an intraday basis. The stock, however, trimmed gains to trade 4 percent higher at Rs 192 on the NSE.
Muthoot's shares surged the most since June 2020, gaining for the fifth day in a row. At 10:58am, Muthoot Finance shares were trading at Rs 1,398.05, up 4 percent from the previous close.
The central bank observed serious deviations in assaying and certifying purity and net weight of gold by IIFL Finance at the time of sanction of loans and at the time of auction upon default.
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IIFL Finance in a conference call addressed the impact of the RBI restrictions, reassuring investors that the near-term profitability won't suffer significantly. It said that RBI's report did not indicate any governance or KYC-AML issues.
The company affirmed that their recovery process remains unaffected and emphasised that there's no embargo on auctioning gold for recovery purposes. Additionally, they highlighted their intention to submit a compliance report to the RBI imminently.
Motilal Oswal believes that this is a major negative setback for IIFL as gold loans constitute 32 percent of its AUM mix and a large proportion of co-lending done by the company was in the gold loan segment. Since these are process-related lapses, the company can work with the regulator to rectify its observations in the gold loan portfolio.
"Given that there is little clarity on the duration for which this ban could remain in effect, it is difficult to quantify the impact of this ban on IIFL’s AUM growth and profitability," the brokerage said.
Jefferies has maintained a 'buy' call on IIFL Finance with a target price of Rs 765 per share. The Reserve Bank of India (RBI) restrictions, subject to review after a special audit and rectification process, may adversely affect earnings, particularly through the unwinding of gold loans, which constitute 32 percent of the company's AUM, the brokerage said.
The limitations could lead to a decline in co-lending income and potentially increase the cost of funds. Jefferies estimates that if the ban on gold lending persists for nine months, IIFL Finance's EPS impact could exceed 25-30 percent.
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