Taking steps to meet RBI's concern: IIFL Fin after ban on giving gold loans

Company has enough liquidity and there is no governance at play, says NBFC's managing director

IIFL Finance swung into action on Tuesday, a day after the Reserve Bank of India (RBI) instructed the non-banking financial company (NBFC) to cease extending gold loans. The firm’s top management addressed its employees to alleviate concerns, particularly in branches that exclusively sell gold loans.

Sources said that the board of IIFL Finance, chaired by former State Bank of India chairman A K Purwar, is assessing the situation; the company is awaiting an audience with the regulator. On Monday, the RBI barred IIFL Finance from extending gold loans and decided to conduct a special audit. Once the audit report is finalised, the restrictions will be reviewed to determine if any gaps have been addressed.

However, the timeline for completing the audit remains unclear, the sources said.
 

“The top management reassured the employees. They were instructed to manage loans that had already been disbursed and to halt fresh loan sanctions and disbursals,” a source revealed.
 

IIFL Finance operates over 2,721 dedicated gold loan branches across 25 states/UTs, staffed by approximately 15,000 employees. The company is now contemplating offering other products from these branches. The average monthly cost of these branches is estimated at Rs 60 lakh.
 

To address one of the regulator’s concerns regarding the assaying and certifying of the purity and net weight of gold, the company is considering hiring an external agency, the sources said. While most NBFCs assess the purity of gold internally, banks primarily outsource this task to external valuation agencies.
 

In a call with analysts, Nirmal Jain, managing director of IIFL Finance, spoke about the charge on the purity and net weight of gold. He explained that such deviation is due to the quality of gold, as the company's conservative auditors arrive at a different value compared to the branch valuation. “At the time of disbursement at the branch level, based on the branch assessment given to the customer, there has not been a single case of LTV (loan-to-value) breach,” Jain said.
 

“Breach is because of net weight done by our audit team when it goes for auction, which is adjusted for quality… Based on that if you calculate the quality, then probably you will find a breach,” he explained.
 

He assured that the company is strengthening its systems to minimise deviations.
 

Jain emphasised that the company is taking steps to address regulatory concerns and stressed that there were no governance issues.
 

“There are no governance or ethical issues at play; these are more operational and procedural issues which will be addressed with all our efforts and sincerity. We are taking immediate and comprehensive steps to address all the concerns,” Jain said. The IIFL stock tanked 20 per cent to hit lower circuit on Tuesday.
 

One of the reasons cited by the regulator for imposing the restriction was the significant disbursal and collection of loan amounts in cash, far exceeding the statutory limit.
 

Jain said NBFCs disburse and collect cash up to Rs 2 lakh, while the RBI, citing certain sections of the Income Tax Act, is of the view cash cannot be more than Rs 20,000.
 

"The interpretation of the IT Act is not clear, people have different views… We are making sure we comply with this also as soon as we are allowed to do fresh disbursals,” he said.
 

IIFL Finance, one of the top two NBFCs in the gold loan business, has a gold loan portfolio of Rs 24,692 crore, which constituted 32 per cent of its total loans of Rs 77,444 crore at the end of the third quarter of FY24.
 

“We believe this is a major negative setback for IIFL as gold loans constitute 32% of its AUM mix and a large proportion of co-lending done by the company was in the gold loan segment,” Motilal Oswal stated in a report. “Since these are process-related lapses, the company can work with the regulator to rectify its observations in the gold loan portfolio.”
 

Jain said that there are no liquidity issues with the company and it would continue to collect repayments. “Until the issue is resolved, we will continue to collect money from repayments. We are adequately covered on liquidity and we do not see any challenges in the foreseeable future. We will also try to cross-sell other products via these branches,” Jain said.