RBI's punitive actions will keep NBFCs on the edge

In continuation with its system clean-up mission, the RBI imposed an embargo on IIFL's gold loan business on March 4 and on JM Financial Products' (subsidiary of JM Financial) loan against shares & IPO financing business the next day, citing persistent regulatory non-compliance and governance issues, as per brokerage Emkay Global Financial Services.

“We believe that the list of financial penalties, and even of business embargos, is likely to scale up and should thus keep regulated entities/fintechs on edge,” the brokerage said.

The RBI's recent action clearly indicates that it has zero tolerance for persistent regulatory non-compliance/mis-governance. We believe these punitive actions will impact systemic growth for NBFCs in the near term, but will hopefully curb unethical business practices, avert systemic collapse as seen in the past, and enhance stakeholder confidence in the long run, the brokerage said.

“Given the different customer profile of NBFCs, we believe that the benefit, if any, for banks will be limited from the IIFL fall-out. On the other hand, Federal Bank had already slowed down its gold sourcing business from Rupeek due to operational issues, while many banks would potentially review their sourcing deals/partnerships across loan products to dodge the regulatory glare; this should thus impact growth to some extent,” it said.

Sentiments are a bit weak in the NBFC space due to RBI's restrictive actions against some NBFCs, says V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

IIFL Finance is down 20 per cent at the lower circuit, JM Financial is down 16 per cent after RBI restrictions.

Other NBFC stocks are also down with L&T Finance Holdings down 9 per cent, Aditya Birla Capital down 7 per cent, Mannapuram Finance down 6 per cent.

RBI ban on IIFL Finance gold lending to dampen growth and profitability, says brokerage Motilal Oswal Financial Services. It is difficult to predict how long it could take to work with the regulator and get this ban reviewed and revoked. “However, in light of some recent episodes where the RBI banned certain activities/products of financial institutions, our base case assumes that it could take around six months to get the RBI to conduct a special audit and subsequently rectify the observations to the satisfaction of the RBI,” the brokerage said.

“Beyond the immediate impact on incremental gold loans, IIFL will also have to work with its existing customers and co-lending partners to prevent any damage to its gold loan brand and trust that it has built over last many years. It will also have to make efforts to retain existing customers and employees,” the brokerage said.

Responding to the RBI directive, JM Financial said, “After careful and detailed review of the order issued by the RBI on the action against JM Financial Products Ltd, we strongly believe that there have been no material deficiencies in our loan sanctioning process. Further, the company has not violated applicable regulations”.

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