On Monday, the Reserve Bank of India directed IIFL Finance to halt approving and issuing new gold loans due to significant supervisory concerns in the company’s gold loan portfolio.
The RBI stated that the regulatory breaches discovered during the inspection, which occurred as of March 31, 2023, were detrimental to the customers’ interests.
During the inspection, RBI discovered significant issues in how gold was assessed and certified for loans, as well as during default auctions. The central bank highlighted violations in the maximum loan-to-value ratio, excessive cash collections, non-compliance with auction procedures, and lack of transparency in fees.
In a partial relief, the company is allowed to manage its existing gold loan portfolio through standard collection and recovery procedures, stated the regulator.
RBI has been addressing concerns with the company’s senior management and auditors regarding these deficiencies for several months. “However, no significant corrective measures have been taken thus far. Therefore, business restrictions are being imposed immediately, in the best interest of customers,” the statement explained.
“These regulatory constraints will be reassessed after a special audit, to be conducted by the RBI, and after the company rectifies the audit and inspection findings to RBI’s satisfaction,” it further added.
As of December 31, 2023, IIFL Finance’s gold loan portfolio stood at ₹24,692 crore, constituting nearly 31% of its total portfolio. In the quarter ending December, the non-bank lender recorded a net profit of ₹490.4 crore, up from ₹378.3 crore a year ago.
At first glance, there were no indications of non-compliance issues. Therefore, the sudden RBI scrutiny is surprising and will significantly affect IIFL’s business. The NBFC’s shares will likely suffer,” commented Shweta Daptardar, a banking analyst at Elara Capital.
What prompted the RBI to take strict measures against IIFL Finance?
The RBI’s directive comes after an inspection of the company’s finances as of March 31, uncovering major supervisory issues in its gold loan portfolio.
• Significant concerns were found in the gold loan portfolio, including serious lapses in assessing and certifying the purity and weight of gold during loan approval and default auctions.
• The central bank detected breaches in Loan-to-Value ratio.
• RBI highlighted significant cash disbursements and collections surpassing statutory limits.
• Failure to adhere to the standard auction process.
• Lack of transparency in customer account charges.
The central bank stated that these practices violate regulations and harm customer interests significantly.
What’s the next step for IIFL Finance?
In the statement, RBI mentioned that in recent months, it has been actively working with IIFL Finance’s senior management and statutory auditors to tackle identified issues in its gold loan portfolio.
The RBI stated that despite ongoing discussions, it hasn’t seen any significant corrective action yet.
As a result, in the best interest of customers, the RBI has imposed immediate business restrictions. These restrictions will be reviewed after a special audit initiated by the RBI and once the company addresses the audit findings and the RBI inspection to the satisfaction of the central bank.
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