IIFL Finance has experienced a significant recovery in its gold loan portfolio following the Reserve Bank of India’s (RBI) decision to lift the ban on its gold loan business on September 19, 2024. The company has successfully increased its loan portfolio by ₹2,000 crore in just one month, signaling a positive turnaround after facing serious regulatory challenges.
Background
IIFL Finance, a prominent non-banking financial company (NBFC), had a robust gold loan portfolio valued at ₹26,000 crore before the RBI imposed restrictions in early March 2024. This embargo was a response to identified supervisory concerns related to the company’s operational practices in its gold loan division. By the time the RBI lifted the ban, the gold loan book had dramatically decreased to ₹10,000 crore, reflecting a significant loss in business during the embargo period.
RBI Inspection Findings
The RBI’s decision to restrict IIFL Finance’s operations stemmed from an inspection of the company’s financial practices as of March 31, 2023. The inspection uncovered several critical issues, which included:
- Assaying and Certification Issues: There were serious deviations in the processes of assaying and certifying the purity and net weight of gold during both the loan sanctioning and auction processes upon default.
- Loan-to-Value (LTV) Ratio Breaches: The inspection revealed violations of the permissible LTV ratios, which are essential to ensure that loans are adequately secured by collateral.
- Excessive Cash Transactions: The RBI noted substantial disbursement and collection of loan amounts in cash that exceeded statutory limits, raising concerns about regulatory compliance.
- Non-Compliance with Standard Processes: The inspection identified lapses in adhering to the standard auction processes and a lack of transparency regarding the charges levied on customer accounts.
IIFL Finance’s Response
In light of the RBI’s findings, Nirmal Jain, the Founder and Managing Director of IIFL Finance, assured stakeholders of the company’s commitment to compliance:
- Rectifications Made: Jain expressed confidence in the company’s efforts to address the RBI’s concerns, stating, “We have satisfied the RBI with our compliance rectifications and necessary corrections. Our compliance framework, along with our risk and audit functions, has been significantly reinforced.”
- Portfolio Recovery: Following the lifting of the embargo, IIFL Finance’s gold loan book has rebounded to around ₹12,000 crore, with Jain expressing optimism that the portfolio could return to its previous level of ₹26,000 crore by the end of the fourth quarter of FY25.
Customer Relations and Industry Trends
Jain emphasized the importance of customer relationships and noted positive trends within the industry:
- Returning Customers: He remarked on the natural return of customers, highlighting, “We’re not doing anything extraordinary to attract customers. They are choosing to come back after completing previous loans,” indicating a strong trust and relationship built over years.
- Shift to Digital Transactions: Jain pointed out a significant industry shift toward cashless transactions, which has alleviated fears that customers might revert to informal money lenders. He stated, “This shift is beneficial for long-term sustainability,” suggesting that both IIFL Finance and its competitors are embracing digital solutions to enhance customer experience and streamline operations.
Conclusion
Looking ahead, Jain remains optimistic about the demand for gold loans, particularly among small businesses, as stable gold prices are expected to drive growth. He believes that the company is well-positioned to navigate the evolving financial services landscape and capitalize on the increasing interest in gold loans.
