IIFL Finance shares crack 20% after RBI order; move a negative setback, says Motilal Oswal

Shares of IIFL Finance Ltd were locked at 20 per cent lower circuit limit in Tuesday's trade after the Reserve Bank of India (RBI) in its order dated March 4 directed the NBFC to stop sanctioning or disbursing gold loans, with immediate effect. Following the development, the stock fell 20 per cent to hit a low of Rs 478.50 on BSE.

Motilal Oswal Securities called it a major negative setback for IIFL, as gold loans constitute 32 per cent of its AUM mix and a large proportion of co-lending done by the NBFC was in the gold loan segment.

"Since these are process-related lapses, the company can work with the regulator to rectify its observations in the gold loan portfolio. Given that there is little clarity on the duration for which this ban could remain in effect, it is difficult to quantify the impact of this ban on IIFL’s AUM growth and profitability. We may look to revise our estimates after the conference call hosted by the IIFL management on March 5," Motilal Oswal Securties said.

Motilal Oswal, however, noted that the RBI has allowed IIFL Finance to service its existing gold loan portfolio through the usual collection and recovery processes.

"The RBI also shared the findings of an inspection that it carried out into the company’s financial position as of March 2023. The regulator found certain material supervisory concerns in IIFL’s gold loan portfolio, including: Serious deviations in gold appraisal and certification of purity and net weight of gold at the time of sanctioning of gold loans and at the time of auction upon default," it said.

Besides, the RBI found breaches in loan-to-value (LTV) ratio; significant cash disbursements and collections (far in excess of the statutory limit); non-adherence to the standard auction process anda lack of transparency in charges being levied on customer accounts.

"The regulator also shared that it was engaged with the company’s senior management team and statutory auditors over the last few months. However, since no meaningful corrective action was forthcoming, it necessitated the imposition of business restrictions with immediate effect to safeguard the interests of customers," Motilal Oswal said.

The RBI will institute a special audit of the company. The regulator will review its ban on gold lending after the company rectifies the issues pointed out by the special audit and the RBI inspection, to the satisfaction of the regulator.