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RBI asks IIFL Finance to stop sanctioning and disbursing fresh gold loans with immediate effect

Submitted by admin on March 6th, 2024

The Reserve Bank of India ordered IIFL Finance to stop approving fresh gold loans immediately after revelations were made about the company’s conspicuous deviations in assaying and certification of purity and net weight of the gold while sanctioning loans and auctioning upon default because all these were clearly in breach of LTV (Loan-to-Value) ratio.

On March 4, the RBI issued an order to IFFL Finance to stop disbursing or approving gold loans with immediate effect after observing certain materials supervisory concerns, which revealed that the company’s gold loan portfolio was not satisfactory.
“The Reserve Bank of India has today, in the exercise of its powers under Section 45L(1)(b) of the Reserve Bank of India Act, 1934, directed IIFL Finance Ltd. to cease, with immediate effect, from sanctioning or disbursing gold loans or assigning/securitizing/ selling any of its gold loans,” the RBI revealed in a press release.

IIFL Finance Clarifies Its Stand on RBI’s Action

“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 endeavor to provide gold loan services in the overall interest of customers.”
Material Supervisory Concerns

Justifying their action, the RBI said it had carried out an inspection of the lending institution concerning its financial standpoint as of March 31, 2023, and it led to the revelation of certain material supervisory concerns in the company’s gold loan portfolio.

The observations from thorough inspection highlighted the company’s deviation from assaying and certification of net weight and purity of the gold at the time of sanctioning loans and also auctioning upon loan default, which led to disruption in the LTV ratio, loan disbursal and cash collection of loan amount far exceeding the statutory limit among others, as per RBI’s clarification.

Further inspection by the RBI brought serious allegations against the company about its lack of transparency and non-conformity to the standard auction process in regard to customer accounts. “These practices, apart from being regulatory violations, also significantly and adversely impact the interest of the customers,” the RBI asserted.

Failure to Take Meaningful Corrective Action

According to the RBI’s assessment over the last few months, the central bank has engaged in talks with the company’s senior management as well as the statutory auditors on these serious issues.

However, the RBI has minced no words saying that the company is yet to take any meaningful measure for course correction, at least there is no evidence to suggest that. This is why the central bank has imposed restrictions on gold loan approval with immediate effect in the overall interests of customers.

The RBI alleges that the company continues to maintain its existing gold loan portfolio through its loan collection and recovery process.
Reviews of the supervisory restrictions are likely to happen after an RBI-instituted special audit is completed and the company does rectification according to the findings from RBI inspections and special audit findings to the central bank’s satisfaction.
“This business restriction is without prejudice to any other Regulatory or Supervisory action that may be initiated by the RBI against the company,” the central bank added.
Gold Loan Portfolio

The company’s gold loan portfolio in the October-December quarter jumped to Rs 24, 692 crore as of December 31. It increased 35 percent yearly and 4 percent quarterly.

The company sanctions and disburses gold through 2,721 towns/cities in 25 states and 4 Union Territories to self-employed, salaried, and MSME customer agents.

The share of the company’s gold loan portfolio is 32 percent of the total assets under management (AUM), in the October-December quarter. The yield from the portfolio was stagnant at 19 percent as per the investor presentation of the company.

The total gross non-performing assets ratio and gold loans ratio were fixed at 0.80 percent as of December 31, 2023.

The company’s net profit jumped by 30 percent yearly to Rs 490.4 crore in the October-December quarter IIFL Finance’s shares dropped down 4 percent to close at Rs 598, on BSE on March 4. However, the benchmark equity index Sensex stood flat at 73,872.29 points at the time of closing.