The Reserve Bank of India has directed IIFL Finance Ltd. to cease and desist with immediate effect, from sanctioning or disbursing gold loans or assigning, securitising or selling any of its gold.
The action was taken after the regulator found material supervisory concerns in the non-banking financial company's gold-loan portfolio after an inspection was conducted on the company with reference to its financial position as of March 31, 2023.
However, the RBI has said that the company can continue servicing its existing loans.
IIFL Finance's shares hit a lower circuit of 20% at Rs 477.75 on the NSE, compared to the 0.19% fall in the benchmark Nifty 50 as of 9:38 a.m.
Shares of IIFL Finance Ltd. have gained a marginal 0.67% in the past month and 32% in the past year.
Key Levels To Watch
Resistance: Rs 672.9 (three-month high)
Support: Rs 552.2 (three-month low)
RBI Observations
Material supervisory concerns were observed in the gold-loan portfolio after serious deviations were found in:
Assaying and certifying purity and net weight of the gold during sanction and upon default
Breaches in loan-to-value ratio
Significant disbursal and collection of loan amount in cash far in excess of the statutory limit
Non-adherence to the standard auction process
Lack of transparency in charges being levied to customer accounts.
IIFL Finance's Gold Portfolio
IIFL Finance's gold-loan portfolio has a presence in 1,492 towns. With an average ticket size of Rs 78,000, the company has 19 lakh gold-loan customers currently, with 2.6 lakh customers added in the third quarter itself. The NBFC co-lending partners for its gold and home-loan products include DCB Bank, Canara Bank, ICICI Bank, Central Bank of India and SBI.
In the nine months ended Dec. 31, 2023, the company's total assets under management grew 34% year-on-year, while its total gold AUM grew 35% YoY. If the company's gold portfolio did not see any growth, the NBFC's total AUM would have only grown 23% YoY.
IIFL Finance's Reaction
During a concall on March 5, Nirmal Jain, chairperson of IIFL Group, said gold testing is a manual and subjective process, done at different branches. "The audit team is generally more conservative, which may differ from how branches look at value," Jain said, addressing the gold-value disparities.
Jain said the company had taken corrective action to ensure differences between branches and audit team is minimal, and are putting in stronger systems in place to ensure deviations are minimal. "All interactions with the RBI have happened over the last 45 days."
He said the company would comply with the RBI circular on auctioning gold and also pointed out that the auction notification charge was not factored by the RBI and still needs to be clarified.
Jain said that while steps taken by the RBI may be a bit hard, they respect the regulator and are already complying with all the conditions and are ready for an audit.
"We will continue to collect money from repayment and don't foresee a problem here", Jain said.
The company has adequate liquidity and will continue its other businesses, except gold loans, he said.
Street View
Jefferies maintains a 'buy' rating on IIFL Finance at a target price of Rs 765 per share.
IIFL Gold loan constitutes 32% of the consolidated AUM and 63% of the co- lending AUM. Any prolonged restrictions can cause impact on earnings since the gold-loan portfolio has higher return on assets and higher rundown times, according to Jefferies.
It highlighted that spreads on co-lending gold loans stand higher at 8–9% compared to the 2–3% for housing loans. Given the restriction stay for nine months, the company's FY25 earnings per share and return on equity could be impacted negatively by 25–30% and 5–5.5% respectively.
Seven analysts tracking the stock have a 'buy' rating on the stock, according to Bloomberg data. The average of 12-month analysts' price targets suggests a potential upside 34.3%.
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