
The Reserve Bank of India (RBI) has announced that it will conduct special audits of two non-banking finance companies (NBFCs), IIFL Finance and JM Financial Products Ltd, starting on April 12. The audits will be conducted by auditors appointed through a tender process initiated by the central bank.
In the case of IIFL Finance, the special audit will focus on the company’s gold loan book. The RBI had previously raised concerns about the company’s compliance during a regular audit and had temporarily halted the issuance of fresh gold loans. The special audit will assess the company’s adherence to the RBI’s queries and regulations.
The decision to conduct the RBI audits follows recent regulatory actions taken against the companies. On March 4, the RBI instructed IIFL Finance to immediately stop sanctioning or disbursing gold loans due to significant supervisory concerns related to the company’s gold loan portfolio. In response, IIFL Finance submitted a compliance report to the RBI within the specified time frame.
Similarly, on March 5, the RBI prohibited JM Financial Products Ltd from providing loans against shares and debentures, including loans against initial public offerings (IPOs), due to serious deficiencies in the company’s loan process and governance issues. The RBI emphasized that these actions were necessary to protect the interests of customers.
The RBI’s inspection of IIFL Finance revealed several material supervisory concerns, including deviations in assessing the purity and weight of gold, breaches in loan-to-value ratio, excessive cash transactions, and non-compliance with auction processes and transparency in customer charges. These practices not only violated regulations but also negatively impacted customer interests.
Despite engaging with the senior management and statutory auditors of IIFL Finance regarding these deficiencies, the RBI found that no meaningful corrective actions had been taken. As a result, the RBI imposed immediate business restrictions on the company, allowing it to only service its existing gold loan portfolio through regular collection and recovery processes.
The restrictions will remain in place until the completion of a special audit and the rectification of audit findings and RBI inspection findings to the satisfaction of the RBI. The RBI made it clear that these restrictions do not preclude any additional regulatory or supervisory actions that may be taken against the company.
IIFL Finance’s gold loan portfolio stood at Rs 24,692 crore as of December 31, 2023, representing 32% of its total assets under management. The company provides gold loans across various locations in India to salaried individuals, self-employed individuals, and MSME customers.
During the October-December quarter, the company reported a net profit of Rs 490.4 crore, marking a 30% increase compared to the previous year. As of March 22, IIFL Finance shares closed at Rs 334.25 on the BSE, while JM Financial shares closed at Rs 74 apiece.