RBI special audit over, necessary measures taken to address regulatory concerns: IIFL Finance

Non-banking finance company, IIFL Finance on June 15 said the special audit initiated by the Reserve Bank of India (RBI) of its books post the action announced in early March and that the company has taken necessary measures to address the regulator’s concerns.

The report of the special audit has been submitted to the RBI and the regulator will now take a call on reviewing the business restrictions imposed. According to a company communication to stock exchanges, IIFL Finance has taken necessary measures to address the identified concerns.

Further, to prevent their recurrence, the board is forming a team to implement correction actions and revise these deviations and non-compliances, the company said.

“Management is confident that these actions will resolve all issues raised by RBI,” the company said.

To mitigate risk of company as an ongoing concern, IIFL Finance has raised Rs1271.3 crore of capital through rights issue, secured Rs500cr through NCDs from long-term investors and implemented cost control measures, including reduction of major discretionary expenditures, the company added.

“These actions ensure that the company’s projected cash flows over the next three years will meet its financial obligations, maintaining robust capital adequacy,” the company said, adding, management is confident in resolving all issues raised by the RBI and has prepared the financial statements on a going concerns basis.

Further, while the gold loan business is a major segment of the standalone company, the group’s consolidated operations significantly benefitting from other operations, the company said.

RBI observations

In a major regulatory action, the RBI, on March 4, asked IIFL FInance to stop sanctioning or disbursing gold loans with immediate effect after observing certain material supervisory concerns in the company’s gold loan portfolio.

“The Reserve Bank of India has today, in exercise of its powers under Section 45L(1)(b) of the Reserve Bank of India Act, 1934, directed IIFL Finance Ltd. to cease and desist, with immediate effect, from sanctioning or disbursing gold loans or assigning/ securitising/ selling any of its gold loans,” the RBI said in a press release.

Explaining the action, the central bank said an inspection of the company was carried out by the RBI with reference to its financial position as of March 31, 2023 which revealed certain  material supervisory concerns were observed in the gold loan portfolio of the company.

These include serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default, breaches in Loan-to-Value ratio (LTV), significant disbursal and collection of loan amount in cash far in excess of the statutory limit among others, the RBI said.

Further, the RBI inspection further revealed non-adherence to the standard auction process and lack of transparency in charges being levied to customer accounts, etc, the central bank said. “These practices, apart from being regulatory violations, also significantly and adversely impact the interest of the customers,” the RBI said.

The gold loan portfolio of the company in October-December quarter grew to Rs 24,692 crore as on December 31. It grew 35 percent on-year and 4 percent on-quarter.

The company provides gold loan through 2,721 towns/cities across 25 states and 4 Union Territories to salaried, self-employed and MSME customer segment.

The share of gold loan portfolio of the company is 32 percent of the total assets under management (AUM), in October-December quarter. The portfolio yield stood at 19 percent, as per company’s investor presentation.

In October-December quarter, of the total gross non-performing assets (NPA) ratio,  gold loans’ ratio stood at 0.80 percent as on December 31, 2023. In October-December quarter , net profit of the company rose 30 percent on-year to Rs 490.4 crore.

In the recent months, the RBI has acted on a clutch of financial institutions including JM Financial Products Ltd, Paytm payments bank and Edelweiss group entities citing various rule violations, intensifying its scrutiny on financial services companies.

Shares of IIFL FInance closed at Rs 466.40, down 1.26 per cent, on BSE on June 14, while benchmark equity index Sensex closed marginally up at 76,992 points.