The Aryavarth Express
Agency(New Delhi): IIFL Finance faced a significant downturn in the stock market, dropping 20% after the Reserve Bank of India (RBI) prohibited the non-banking finance company from issuing gold loans. This decision by the RBI, announced late on Monday, came as a result of identified “serious deviations” in the evaluation of gold used as collateral, violations concerning the maximum allowable loan-to-value ratio, and the obscurity of fees charged to clients.
This abrupt measure by the central regulator sent IIFL Finance’s stocks tumbling to the lower limit of the exchange-imposed trading band, marking their most drastic decline since October 2008. The company, which also deals in home loans, expressed surprise at the speed of the RBI’s decision during a call with analysts and investors on Tuesday.
IIFL Finance disclosed that its gold loan portfolio had been a subject of concern in previous discussions with the RBI and affirmed that steps towards rectification were underway. Despite these efforts, the immediate impact on the company’s profitability is anticipated to be minor. However, the gold loans under IIFL Finance’s management, which accounted for 32% of its total loan assets and amounted to 246.92 billion rupees (approximately $3 billion) as of December 31, suggest that the ban’s continuation could significantly affect its earnings.
Analysts from Jefferies, a global brokerage firm, speculated that earnings per share could decline by 25%-30% if the restrictions last for nine months. They also noted the potential for decreased co-lending income and an increase in financing costs.
In contrast, competitors Manappuram Finance and Muthoot Finance saw their shares surge by 7% and 9%, respectively, indicating a shift in market dynamics favoring IIFL’s rivals. As of December 31, Manappuram Finance managed gold loans worth 199 billion rupees, while Muthoot Finance handled 692.21 billion rupees.
The RBI has stated that it will reassess the limitations imposed on IIFL Finance following a special audit and necessary corrections by the company. This decision underscores the central bank’s stringent approach to regulatory compliance and transparency in the financial sector, aiming to safeguard consumer interests and maintain the integrity of financial operations.
