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On Wednesday, Fairfax India Holdings Corporation, a longstanding investor in IIFL Finance announced that it will provide liquidity support of $200 million amidst the RBI embargo on the company’s gold loan disbursements.
The reversal comes after a 36% plunge in the stock over the past two trading sessions in the wake of the Reserve Bank of India (RBI) order directing the company to cease and desist from sanctioning or disbursing gold loans or assigning/securitising/selling any of its gold loans. It was followed by a downgrade by Jefferies.
The RBI decision came following an inspection of the company by the RBI with regard to its financial position as of March 31, 2023, where the banking regulator found discrepancies in company’s functioning in certain areas.
“Certain material supervisory concerns were observed in the gold loan portfolio of the company, including 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; significant disbursal and collection of loan amount in cash far in excess of the statutory limit,” the company filing said quoting RBI’s order.
Among other things, non-adherence to the standard auction process and lack of transparency in charges being levied to customer accounts, etc were other regulatory violations found by the banking regulator.RBI said that the above violations “significantly and adversely” impact the interest of the customers.On Wednesday, the shares of IIFL Finance tanked 20% hitting their 52-week low of Rs 382.20 on the NSE. Jefferies slashed its target price to Rs 435 from an earlier target of Rs 765 while recommending a hold rating versus a ‘buy’ it held earlier.
Jefferies in a note said that RBI’s restriction should dent earnings due to a rapid unwinding of the profitable gold loan book even as the timing of lifting of the ban remains uncertain. Assuming the ban stays for nine months, it cuts FY25-26 EPS by 26-27% and ROE by 460-480 bps. The profit is expected to fall 6% in FY26E, the brokerage noted.
Another brokerage, B&K Securities also saw the gold loan portfolio as the major growth driver for IIFL Finance. Around 25% of consolidated profitability stems from gold loans and this aspect is likely to be affected by the imposed RBI restrictions, B&K said.
The company issued a statement saying that RBI has been engaging with the senior management and the statutory auditors of the company on these deficiencies over the last few months, however, no meaningful corrective action has been evidenced so far.
“We reaffirm our commitment to rectify observations of the RBI in 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,” the company said in its filing to the exchanges.
RBI has allowed the company to continue to service its existing gold loan portfolio through the usual collection and recovery processes.
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