Shares of IIFL Finance hit 20% lower circuit limit for the second consecutive session on Wednesday, triggered by the Reserve Bank of India’s (RBI) ban on gold loans. The sentiment was further dampened after foreign brokerage Jefferies downgraded the rating of the stock from ‘Buy’ to ‘Hold’, saying that the RBI’s action would hurt earnings "due to the rapid unwinding of the profitable gold loan book".
Reacting to the news, IIFL Finance shares opened lower for the fourth straight session at ₹382.80, down 20% against the previous closing price of ₹478.50 on the BSE. The stock has fallen 38% in the last four sessions, while its market capitalisation slipped to ₹14,603 crore.
At the current price of ₹382.80, IIFL Finance is trading at its 52-week low level, down 84% against its 52-week high of ₹704.20 touched on October 16, 2023. The share of the non-banking financial company (NBFC) has fallen nearly 16% in a year; 36% in six months; and 37% in the calendar year 2024 (year-to-date).
The U.S.-based brokerage house Jefferies has cut its target price on IIFL Finance to ₹435 from ₹765 estimated earlier after the central bank barred IIFL Finance from disbursing gold loans. The agency believes that the bank will impact its earnings as the gold loan book accounts for around 32% of assets under management (AUM).
“RBI's restriction on disbursing gold loans due to material supervisory concerns should dent earnings due to rapid unwinding of profitable gold loan book (32% of AUM), lower co-lending income and potentially higher CoF (cost of funding)", Jefferies says in a report.
In the third quarter ended December 31, 2023, IIFL Finance’s gold loan AUM grew to ₹24,692 crore, up 35% YoY and 4% QoQ. The company provides gold loans in 2,721 towns/cities across 25 states and 4 Union Territories to salaried, self-employed and MSME customer segments.
The RBI on March 4 asked the Mumbai-based financial services company to stop sanctioning and disbursing gold loans with "immediate effect", raising supervisory concerns in the company’s gold loan portfolio. The company, however, is allowed to continue to service its existing gold loan portfolio through the usual collection and recovery processes.
“The Reserve Bank of India has today, in exercise of its powers under Section 45L(1)(b) of the RBI Act, 1934, directed IIFL Finance to cease and desist, with immediate effect, from sanctioning or disbursing gold loans or assigning/ securitising/ selling any of its gold loans,” the central bank said in a notification.
As per the RBI, an inspection of the company was carried out by the central bank with reference to its financial position as on March 31, 2023. “Certain material supervisory concerns were observed in the gold loan portfolio of the company, including serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default; breaches in loan-to-value ratio; significant disbursal and collection of loan amount in cash far in excess of the statutory limit; non-adherence to the standard auction process; and lack of transparency in charges being levied to customer accounts, etc.”
The central bank said that these practices, apart from being regulatory violations, also significantly and adversely impact the interest of the customers.
Over the last few months, the RBI has been engaging with the senior management and the statutory auditors of the company on these deficiencies; 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, it added.
The apex bank said that the “supervisory restrictions” will be reviewed upon completion of a special audit to be instituted by the RBI and after rectification by the company of the special audit findings and the findings of RBI Inspection, to the satisfaction of the central bank.
Meanwhile, IIFL Finance on March 5 clarified that the RBI action on the gold loan business was due to 'operational issues', and not due to governance or ethical problems. “We wish to make it unequivocally clear that there are no governance or ethical issues," said Nirmal Jain, managing director, in a call with analysts on Tuesday. “These are operational issues that will be addressed with all our effort and sincerity. We are taking immediate and comprehensive steps to address all concerns made by RBI," he added.
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