In a significant blow to IIFL Finance, its shares plummeted by 20 percent on March 5, hitting the lower circuit, following the Reserve Bank of India’s (RBI) directive to cease gold loan sanctioning and disbursal due to material supervisory concerns. The RBI invoked its powers under Section 45L(1)(b) of the Reserve Bank of India Act, 1934, to enforce the immediate cessation of these operations by IIFL Finance.
The RBI, in a press release, stated, “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.” This move has prompted concerns about the impact on IIFL Finance’s earnings, particularly as gold loans constitute 32 percent of the company’s Assets Under Management (AUM).
IIFL Finance responded to the regulatory action, stating, “We reaffirm our commitment to rectify observations of the RBI in the gold loan portfolio to comply with RBI findings at the earliest and will continue with our endeavor to provide gold loan services in the overall interest of customers.”
During the October-December quarter, IIFL Finance’s gold loan portfolio witnessed a significant 35 percent YoY growth, reaching Rs 24,692 crore. The company operates in 2,721 towns/cities across 25 states and four Union Territories, serving salaried, self-employed, and MSME customer segments.
Jefferies, despite the regulatory setback, maintained a ‘buy’ call on IIFL Finance with a target price of Rs 765 per share. The brokerage acknowledged that the RBI’s restrictions, pending a special audit and rectification process, might impact earnings, particularly through the unwinding of gold loans.
If the gold loan ban persists for nine months, Jefferies estimates that IIFL Finance’s earnings per share (EPS) could witness a substantial impact, exceeding 25-30 percent. The limitations imposed by the RBI are expected to affect co-lending income and potentially increase the cost of funds for the NBFC.
In the previous trading session, IIFL Finance shares closed 3 percent lower at Rs 598.00 on the National Stock Exchange (NSE). Despite this setback, the non-banking financial company’s stock has rallied 31 percent in the last year, outperforming the benchmark Nifty 50, which recorded a 26 percent rise during the same period.
