RBI Directs IIFL Finance to Halt Gold Loan Operations Prompting 20% Share Price Fall

India’s financial landscape witnessed a significant event today as the Reserve Bank of India (RBI) issued a directive to leading non-banking financial company IIFL Finance. The central bank mandated an immediate cessation of all gold loan operations conducted by IIFL Finance, invoking Section 45L(1)(b) of the Reserve Bank of India Act, 1934.

In a press release, the RBI highlighted several concerning findings in its inspection of IIFL Finance’s gold loan portfolio. These findings included deviations in gold assaying and certification processes, breaches in loan-to-value ratios, and unregulated cash transactions that surpassed statutory limits.

Following the RBI’s directive, IIFL Finance saw a sharp 20% decline in its share price, triggering a lower circuit halt in trading. This marked the third consecutive session of losses for the company’s stock.

Jefferies, a prominent brokerage firm, maintained a positive outlook on IIFL Finance but acknowledged potential earnings impacts due to the regulatory restrictions. The firm warned of a substantial decline in co-lending income and higher funding costs if the ban on gold loans persists.

Despite the challenges posed by the RBI directive, IIFL Finance expressed its commitment to addressing the concerns raised and ensuring compliance with regulatory standards. The company assured stakeholders that it would work diligently to rectify the issues in its gold loan portfolio.

The RBI’s decision immediately halted IIFL Finance’s ability to sanction or disburse gold loans, as well as assign, securitize, or sell existing gold loan assets. However, the company can continue servicing its current gold loan portfolio through standard collection and recovery processes.

Notably, IIFL Finance collaborates with several prominent banks for gold loan operations, including DSB Bank, Canara Bank, Union Bank, UCO Bank, and others. The NBFC’s gold loan portfolio represents a significant portion of its overall lending activities, with a notable 30% CAGR growth in the last four years.