The Reserve Bank of India (RBI) has banned IIFL Finance Ltd. from sanctioning or disbursing new gold loans or assigning/securitising/selling any of its existing gold loans with immediate effect. The company can, however, continue to service its current gold loan portfolio through usual collection and recovery processes, the RBI said in a statement on Monday.
Why did RBI take this action?
The RBI said that its inspection of IIFL Finance’s financial position for the year ending March 31, 2023, revealed material supervisory concerns in the gold loan portfolio of the company, including:
- Granting more loans than what the collateral permitted: The company appeared to be lending more money than what the value of the gold pledged by the customers allowed, exposing itself and the customers to higher risks.
- Deviating from the standard procedure of assaying and certifying the purity and net weight of the gold: The company did not follow the proper method of testing and verifying the quality and quantity of the gold at the time of sanctioning loans and at the time of auctioning the gold upon default, which could lead to fraud and loss for both parties.
- Breaching the maximum loan-to-value ratio: The company exceeded the limit of lending up to 75% of the value of the gold, as prescribed by RBI, which could result in over-indebtedness and default by the customers.
- Disbursing and collecting loan amounts in cash over the statutory limit: The company violated the rule of not giving or taking more than Rs 20,000 in cash for any transaction, which could enable money laundering and tax evasion.
- Lacking transparency in charges being levied to customer accounts: The company did not disclose clearly the fees and charges that it applied to the customer accounts, such as processing fees, interest rates, penal charges, etc., which could mislead and exploit the customers.
These practices, apart from being regulatory violations, also significantly and adversely impact the interests of customers, as the RBI pointed out.
How did IIFL Finance respond?
The RBI said that over the last few months, it 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, the RBI said.
IIFL Finance has not issued any official statement on the matter yet. The company’s shares closed 3.35 per cent lower at Rs 595 against the previous close of Rs 618.85 on BSE on Monday.
What is the impact of this decision?
Gold loans constitute 32 per cent or Rs 20,733 crore of IIFL Finance’s total assets under management as of March 31, 2023, according to the company’s annual report. The company’s gold loan book rose 28 per cent on a year-on-year basis, and its average ticket size was Rs 60,000 in FY22-23.
The RBI’s decision may affect the company’s growth prospects and profitability in the near term, as well as its reputation among customers and investors. The RBI said that these 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.
This business restriction is without prejudice to any other regulatory or supervisory action, which may be initiated by the RBI against the company, the central bank statement added.
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