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On Tuesday morning, IIFL Finance shares opened down 20% as investors dumped their shares after the banking regulator issued a statement on Monday evening detailing some rulings.
“We want to make it unequivocally clear that there are no ethical or governance issues,” CEO Nirmal Jain said on a call with analysts on Tuesday. “These are operational issues which will be addressed with all our efforts and sincerity. We are taking immediate and comprehensive steps to address all the concerns raised by the RBI.”
One of the issues flagged by the RBI was “loan-to-value violations”, raising the question of whether the IIFL actually properly determines the value of gold before granting loans. This led some investors and analysts to question whether an aggressive approach by the RBI According to three executives, executives posted in thousands of IIFL branches could have given more money to customers by overvaluing the value of gold promised with the NBFC based in Mumbai.
IIFL’s gold lending branches have more than doubled in the last 30 months, from just over 1,000 at the end of June 2021 to 2,721 as of December 31, 2023. Gujarat, Maharashtra and Goa accounted for 30% of the $Gold loans of Rs 24,692 crore disbursed at the end of December 31, 2023. IIFL’s total assets under management were $77,444 crore at the end of the third quarter.
According to the RBI, gold loan providers like IIFL Finance, Muthoot Finance and Manappuram Finance can provide loans up to 90% of the value of gold. A company can lend more money to its clients if it can demonstrate that it is promised higher purity gold, it is explained.
Jain, however, said that was not the case. He clarified that the NBFC’s internal audit team, which assessed only loans that turned into NPAs and went up for auction, is usually conservative.
According to IIFL Finance, it offered loans against gold to over 1.9 million customers, of which 82,000 loans were auctioned. The RBI found a difference between the value of gold and the loan offered to customers in 55,000 cases.
IIFL Finance said the management has been engaging with the RBI only for the last 45 days after receiving the comments on the inspection report 2022-23 in January 2024.
On Monday, the RBI, in its official statement, said it has been engaging with the senior management and statutory auditors of IIFL Finance for several months. As no significant action was observed, regulatory action was taken.
“The measures taken by the RBI may be a bit difficult. We have taken corrective measures to ensure that the gaps between the branches and the audit team are minimal,” Jain said.
On the issue of “significant disbursement and collection of cash loan amount far exceeding the legal limit”, Jain said the IIFL has been disbursing and collecting gold cash loans up to $2 lakh ticket size, which in the opinion of the RBI was above the legal limits of $20,000 according to the Income Tax Law.
Despite these clarifications, some analysts point out two major challenges for the company. Firstly, the failure to disburse new gold loans means that IIFL’s growth in profitability will be questioned. Gold loans are the second largest business division, with a total of 32%, just a little less than 33% of home loans offered by IIFL Finance, as of December 31, 2023.
Second, capital raising plans shared by management could be affected.
“Investors are concerned about how widespread this practice was throughout the company or whether it was limited to a few branches. “Anyway, when new business cannot be done for one of the largest and fastest growing business units, then it is a no-brainer that overall growth and profitability will suffer,” said a Delhi-based executive at an alternative financial firm that requested anonymity.
For now, IIFL maintains that it does not foresee any liquidity issues and there would be no major impact on profitability.
Jain and R. Venkataraman, joint managing director of IIFL Finance, are promoters of the company and own 24.8%, while institutional investors own 54% and retail investors 21.2% as of December-end. Fairfax and Capital Group are the largest institutional investors with 15.1% and 7.9%, respectively.
Sapno Ko Sach Karne Ka Seedha Raasta (the right path to making dreams come true) are the opening lines of IIFL Finance’s annual report for 2022-23.
As the financial year ends, many investors and customers are wondering if IIFL Finance has not lived up to its promise.
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Posted: Mar 5, 2024, 10:31 pm IST