IIFL shares freeze at 20% lower circuit after RBI bans company from sanctioning new gold loans

IIFL share price: Shares of IIFL Finance were locked in a 20 per cent lower circuit in Tuesday's trade (March 5) on the BSE at Rs 478.5 apiece, a day 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.

With today's fall, the stock has slipped for the third straight session.

As of 9:54 a.m., shares of IIFL Finance slipped 20 per cent, or Rs 119.6, to Rs 478.5 apiece. The market capitalisation of the company at around the same time stood at Rs 18,253.97 crore.

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 comes 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. 

As per Zee Business Research, the company's gold loan portfolio is 32 per cent of its total portfolio. As of December 31, the company's gold loan portfolio stood at Rs 24,700 crore. Furthermore, the company works with 7 to 8 banks for gold loans, including DSB Bank, Canara Bank, Union Bank, UCO Bank, South Indian Bank, Karur Vyas Bank, Shivalik Small Finance Bank, and IDBI Bank.

In the last four years, there has been a 30 CAGR growth in gold loans for the company. 

What is the company's stance on the ban? 

The NBFC's management said 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 share price: Past performance 

In a year, the stock has gained just over 5 per cent against the Nifty50's rise of over 26 per cent. 

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