IIFL Finance hits 20% lower circuit; Jefferies downgrades the stock to hold

IIFL Finance RBI ban, IIFL Finance share price, why are IIFL Finance share falling: IIFL Finance shares nosedived 20 per cent on Wednesday, March 6, to hit a 52-week low of Rs 382.80 on D-Street after Jefferies double downgraded the NBFC stock to hold from buy after the Reserve Bank of India (RBI) barred the company from sanctioning or disbursing gold loans or assigning, securitising, or selling any of its gold loans earlier this week.

At close, shares of IIFL Finance were locked in a 20 per cent lower circuit in Wednesday's trade. The NBFC stock traded with heavy sell-off volumes as about 4.14 lakh shares changed hands in intraday trade so far, sharply lower than a daily average of 0.24 recorded in the past two weeks, according to provisional exchange data.

The company’s market capitalisation stood at Rs 14,603.17 crore, according to BSE.

IIFL Finance share price target: What does Jefferies say?

Jefferies has double-downgraded IIFL Finance to hold from buy. The global brokerage has reduced the target price on the NBFC stock by Rs 330 to Rs 435 from Rs 765 earlier. The revised target translates to 13.6 per cent downside potential from current levels. 

According to Jefferies, the RBI's restriction will dent the company's earnings due to the rapid unwinding of its profitable gold loan book.

Highlighting that the timing of the lifting ban is uncertain, the brokerage added in its report, "Assuming the ban stays for 9 months, we cut FY25–36 EPS by 26-27% and ROE by 460–480 bps." Jefferies expects profit to fall by 6 per cent in FY26E.

IIFL Finance RBI news: Management's stance on the ban

Mumbai-headquartered diversified financial services company's management said on March 5 in the conference call that there are no issues with the ethics and governance of gold loans. It further said that the problem is procedural and operational.

The company will submit its report to RBI in the coming days and is in talks for a special audit. The management said that there is no immediate impact on the book, but if the issue isn't resolved, then it may have a certain impact.

The management also clarified that no penalty has been imposed on the company.

IIFL Finance RBI news: Why did the RBI impose a ban?

The RBI said its inspection of IIFL's financial position has revealed material supervisory concerns in the gold loan portfolio of the company, including serious deviations in assaying and certifying the purity and net weight of the gold at the time of loan sanction and at the time of auction upon default.

The inspection showed the following concerns:

>> Breaches in the loan-to-value ratio;

>> Significant disbursal and collection of loan amounts in cash far over the statutory limit;

>> Non-adherence to the standard auction process; and

>> A lack of transparency in charges being levied on customer accounts by the IIFL.

These practices, apart from being regulatory violations, also significantly and adversely impact the interests of customers, as the RBI pointed out.

The ban came into effect immediately.

The company can, however, continue to service its existing gold loan portfolio through the usual collection and recovery processes, the RBI said.

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