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RBI to Conduct Special Audit for IIFL Finance and JM Financial Products from April 12

Submitted by admin on March 27th, 2024

On March 4, the Reserve Bank of India asked IIFL Finance to stop approving or disbursing gold loans with immediate effect following its observation of certain material supervisory discrepancies in the lending institution’s gold loan portfolio.

The RBI will conduct special audits of NBFCs (Non-Banking Finance Companies) such as, IIFL Finance and JM Financial Products Limited on April 12. The RBI has called for tenders to appoint auditors who will be assigned the task of special audits.

In the case of IIFL finance, a special audit will be conducted on the company’s gold loan book.

The RBI has said in no uncertain terms that they are stopping IIFL Finance from sanctioning fresh gold loans and informed them to conduct a special audit to ensure compliance to the queries raised in the regular audit.

“Our responses to RBI were submitted within the stipulated time,” stated AK Purwar, Chairman and Independent Director of IIFL Finance in response to a news portal’s query.

RBI Action on JM Financial Products Ltd  

On March 5, the RBI asked JM Financial Products Limited to stop sanctioning loans against shares and debentures, including approval and disbursal of loans against IPO (Initial Public Offering) of shares with immediate effect.                      

The RBI has made no secret of its observation of certain major discrepancies in the loan processing of the above-stated non-banking institutions, which they highlighted while expressing their concerns on the governance issues in these companies, in addition to breach of regulatory guidelines.

“This action is necessitated due to certain serious deficiencies observed in respect of loans sanctioned by the company for IPO financing as well as NCD subscriptions,” RBI had stated.

The RBI informed about having carried out an inspection of IIFL regarding its financial position as of March 31, 2023. During the inspection, the RBI observed certain material supervisory concerns in the company’s gold loan portfolio.

These include major deviation in assay and certification of purity and net weight of the gold at the time of loan sanctions and at the time of auctioning upon default, which violates the Loan-to-Value ratio, significant loan disbursal, and collection in cash in addition to the statutory limit among others, as stated by the RBI.

Furthermore, the RBI inspection disclosed non-compliance to the standard auction process and deficiency of transparency in charges against customer accounts etc.

“These practices, apart from being regulatory violations, also significantly and adversely impact the interest of the customers,” the RBI stated.

According to the RBI, they have been engaging with the company’s senior management and statutory auditors over the last few months to address these serious issues.

“However, no meaningful corrective action has been evidenced so far. This has necessitated the imposition of business restrictions with immediate effect, in the overall interest of customers,” the Central Bank added.

However, the RBI has not barred the company from carrying out its function with its existing gold loan portfolio through its usual process of loan collection and recovery.

The RBI will review the supervisory restrictions upon completing a special audit and after the company rectifies the special audit findings resulting from the RBI’s meticulous inspection, 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 RBI explained.

IIFL Gold Loan Portfolio

 In the October-December quarter, the company’s gold loan portfolio jumped to Rs 24, 692 crore as of December 31. It secured an excellent growth of 4 percent in the quarter and 35 percent in the year.

 The company operates its gold loan business through 2,721 towns/cities across 25 states and 4 Union Territories. The loan is provided to MSME units as well as salaried and self-employed customers.

 The company’s share of the gold loan portfolio is 32 percent of their total assets under management (also called AUM) in the October-December quarter. As per IIFL’s investor penetration, the yield from the portfolio stood at 19 percent.

In the October-December quarter, the gold loan ratio of the total gross non-performing assets (NPA) ratio stood at 0.80 percent as of the last day of December 2023.

In the same quarter, the company’s net profit jumped 30 percent on-year to Rs 490.4 crore.

IIFL Finance’s shares were down 0.36 percent while closing last at Rs 334.25, on BSE on March 22 while the benchmark equity index Sensex rose 0.26% to close at 72831.94 points while of JM Financial showed a rise of 0.26 percent when closing at Rs 74 apiece.