RBI Imposes Restrictions on IIFL Finance’s Gold Loan Disbursements, Shares Plummet

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Shares of IIFL Finance plunged by 20 percent to ₹478.50 on Tuesday following the Reserve Bank of India’s (RBI) directive barring the company from sanctioning and disbursing gold loans with immediate effect. The RBI’s decision stems from certain material supervisory concerns regarding IIFL Finance’s gold loan portfolio.

In a press release, the RBI invoked its powers under Section 45L(1)(b) of the Reserve Bank of India Act, 1934, directing IIFL Finance Ltd to cease and desist from sanctioning or disbursing gold loans, as well as assigning, securitizing, or selling any of its gold loans.

In response to the RBI’s action, IIFL Finance issued a statement reaffirming its commitment to rectify the observations raised by the RBI in its gold loan portfolio. The company expressed its dedication to complying with the RBI’s findings as soon as possible and assured customers of its ongoing efforts to provide gold loan services.

Despite the regulatory setback, Jefferies, a global investment banking firm, has maintained its ‘buy’ recommendation on IIFL Finance, setting a target price of ₹765 per share. However, Jefferies acknowledges the potential negative impact on the company’s earnings due to the RBI’s restrictions, pending a special audit and rectification process.

The limitations imposed by the RBI could lead to a decline in co-lending income and an increase in the cost of funds for IIFL Finance. Jefferies’ analysis suggests that if the ban on gold loans persists for nine months, it could result in a substantial decline of 25-30 percent in the company’s earnings per share (EPS).

Despite the challenges posed by the regulatory action, IIFL Finance reported a 29 percent growth in net profit to ₹545 crore for the December quarter, driven by higher loan sales and interest income. The company’s overall loan growth surged by 34 percent to ₹77,444 crore, with notable growth in key products such as gold and home loans.

Furthermore, IIFL Finance witnessed an improvement in asset quality, with the gross non-performing assets ratio declining to 1.7 percent and the net non-performing assets ratio decreasing to 0.9 percent. Nirmal Jain, the founder of the company, highlighted these positive developments amidst the regulatory challenges.

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