On June 15, IIFL Finance, a non-banking finance company, announced the completion of a special audit initiated by the Reserve Bank of India (RBI) following regulatory actions announced in early March. The company stated that it has implemented the necessary measures to address the regulator’s concerns.The audit report has been submitted to the RBI, which will now decide on reviewing the business restrictions imposed on the company. In a communication to stock exchanges, IIFL Finance confirmed that it has taken the required actions to address the identified issues.
To prevent the recurrence of these issues, the company’s board is forming a team to implement corrective actions and address deviations and non-compliances. “Management is confident that these actions will resolve all issues raised by RBI,” the company said.
To mitigate risks and ensure the company’s ongoing operations, IIFL Finance has raised Rs 1,271.3 crore through a rights issue, secured Rs 500 crore via non-convertible debentures (NCDs) from long-term investors, and implemented cost control measures, including reductions in major discretionary expenditures. These measures are expected to ensure that the company’s projected cash flows over the next three years will meet its financial obligations while maintaining robust capital adequacy.
The company also highlighted that while the gold loan business is a significant segment of its standalone operations, the group’s consolidated operations benefit significantly from other business areas.
RBI Observations
On March 4, the RBI directed IIFL Finance to immediately cease sanctioning or disbursing gold loans after identifying significant supervisory concerns in the company’s gold loan portfolio. The central bank exercised its powers under Section 45L(1)(b) of the Reserve Bank of India Act, 1934, to issue this directive.
The RBI’s inspection, referencing the company’s financial position as of March 31, 2023, revealed serious deviations in the assaying and certifying of gold purity and net weight at the time of loan sanction and auction upon default. Additionally, there were breaches in the Loan-to-Value (LTV) ratio, significant cash disbursals and collections far exceeding statutory limits, non-adherence to standard auction processes, and a lack of transparency in charges levied on customer accounts. These practices not only violated regulations but also adversely affected customer interests.
Company Performance
As of December 31, the gold loan portfolio of IIFL Finance grew to Rs 24,692 crore, marking a 35 percent year-on-year increase and a 4 percent quarter-on-quarter increase. The company provides gold loans across 2,721 towns and cities in 25 states and 4 Union Territories to salaried individuals, self-employed persons, and MSME customers.
In the October-December quarter, the gold loan portfolio constituted 32 percent of the total assets under management (AUM) with a portfolio yield of 19 percent. The gross non-performing assets (NPA) ratio for gold loans stood at 0.80 percent as of December 31, 2023. During the same quarter, IIFL Finance’s net profit rose by 30 percent year-on-year to Rs 490.4 crore.
Regulatory Actions
In recent months, the RBI has increased its scrutiny of financial institutions, including JM Financial Products Ltd, Paytm Payments Bank, and entities within the Edelweiss Group, citing various regulatory violations.
On June 14, shares of IIFL Finance closed at Rs 466.40, down 1.26 percent on the BSE, while the benchmark equity index Sensex closed marginally up at 76,992 points.
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