IIFL Finance Gets $200 mn Boost from Fairfax After RBI Ban

IIFL Finance, one of India’s leading non-banking finance companies (NBFCs), has received a major boost from its top shareholder Fairfax India, which has committed to provide up to $200 million in liquidity support to the company. This comes after the Reserve Bank of India (RBI) imposed an embargo on the company’s gold loan disbursements, effective from March 5, 2024, citing “material supervisory concerns” in its gold loan portfolio.

Fairfax India Holdings Corporation, backed by Prem Watsa and a longstanding investor in IIFL Finance Limited, announced its commitment in a press release on Wednesday. “We have been long-term investors in the IIFL group of companies and have full trust and confidence in the company’s strong management team led by Nirmal Jain and R Venkataraman,” said Prem Watsa, chairman of Fairfax India, which holds around 15 per cent stake in IIFL Finance.

The liquidity support will be provided through subscription of non-convertible debentures (NCDs) or any other permitted mode within the regulatory framework. The company said that the funds will be used for meeting its obligations and growing its business in compliance with RBI’s directions. The company also said that the liquidity support will be available for a period of 18 months from the date of subscription.

RBI’s directive and its impact

The central bank had asked IIFL Finance to ‘cease and desist’ from sanctioning, disbursing and selling gold loans with immediate effect, following an inspection of its books. RBI said that it had observed “serious deficiencies” in the company’s gold loan portfolio, which could “significantly and adversely” affect its customers, depositors and other stakeholders.

The company said that it was taking corrective measures to address the issues raised by RBI and that it was committed to complying fully with the regulator’s directives. It also said that it had adequate liquidity and capital adequacy to meet its obligations and that it was confident of resuming its normal business operations soon.

The ban on gold loan disbursements could have a negative impact on the company’s earnings, growth and liquidity position. According to brokerage Jefferies, the company could see its earnings per share (EPS) fall by over 25-30 per cent if the ban stays for nine months. The company could also face lower co-lending income and higher cost of funds due to the uncertainty.

However, the liquidity support from Fairfax India could mitigate some of these risks and provide confidence to investors and lenders. The company’s share price, which had fallen by around 36 per cent since the RBI’s directive, recovered by over 10 per cent on Wednesday after the announcement of Fairfax India’s commitment.

RBI will review the restrictions on IIFL Finance after completion of a special audit and rectifications by the company. The company said that it was hopeful of resolving the matter at the earliest and restoring its normal business operations.

IIFL Finance gold loan business and other products

IIFL Finance is one of the largest players in the gold loan segment, which accounts for around 32 per cent of its total loan assets. As of December 31, 2020, the company had a gold loan portfolio of Rs 24,692 crore, with an average loan-to-value ratio of 67 per cent. The company offers gold loans at competitive interest rates ranging from 9.99 per cent to 24 per cent per annum and flexible repayment options ranging from one month to 36 months to customers across rural and urban areas.

The company also has a diversified portfolio of other products, such as home loans, business loans, microfinance, vehicle finance and capital market finance. The company has a network of over 2,500 branches across India and serves over 4 million customers. The company reported a net profit of Rs 325 crore for the quarter ended December 31, 2020, up by 40 per cent year-on-year. The company also declared an interim dividend of Rs 3 per share for FY2024.

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