Only operational issues, no ethical breach, says IIFL Finance

On Tuesday morning, shares of IIFL Finance opened 20% lower as investors dumped shares after the banking regulator issued a statement on Monday evening that detailed some lapses.

“We wish to make it unequivocally clear that there are no governance or ethical issues,” said Nirmal Jain, managing director, in a call with analysts on Tuesday. “These are operational issues that will be addressed with all our effort and sincerity. We are taking immediate and comprehensive steps to address all concerns made by RBI.”

One of the issues flagged by RBI was “breaches in loan-to-value ratio”, raising a question on whether IIFL indeed ascertains the value of gold properly before giving loans. This prompted a few investors and analysts to wonder if an aggressive approach by sales executives was the reason. Executives stationed at thousands of IIFL branches, according to three executives, could have given more money to customers by overvaluing the gold value pledged with the Mumbai-based NBFC.

IIFL’s dedicated gold-loan branches have more than doubled in the past 30 months from a little more than 1,000 at the end of June 2021 to 2,721 as of 31 December 2023. Gujarat, Maharashtra and Goa accounted for 30% of the ₹24,692 crore gold loans disbursed at the end of 31 December 2023. IIFL’s total assets under management were ₹77,444 crore at the end of Q3.

According to RBI, gold loan providers such as IIFL Finance, Muthoot Finance and Manappuram Finance can give loans up to 90% of the value of the gold. A firm can lend more money to customers if it can show it has a higher purity of gold pledged with it, goes the explanation.

Jain, however, said this was not the case. He clarified that the NBFC’s internal audit team, which assessed only the loans that turned into non-performing assets and went for auctioning, is usually conservative.

According to IIFL Finance, it offered loans against gold to over 1.9 million customers, of which 82,000 loans went for auction. RBI found a difference in the value of the gold and the loan offered to customers in 55,000 instances.

IIFL Finance said the management has been engaged with RBI only over the past 45 days after it received the comments on the 2022-23 inspection report in January 2024.

On Monday, RBI, in its official release said it has been engaging with the senior management and statutory auditors of IIFL Finance for several months. Since no meaningful action was noticed, regulatory action was taken.

“Steps taken by RBI may be a bit hard. Have taken corrective action to ensure differences between branches and audit team is minimal,” Jain said.

On the issue of “significant disbursal and collection of loan amount in cash far in excess of the statutory limit”, Jain said IIFL has been disbursing and collecting gold loans in cash up to ₹2 lakh of ticket size, which according to RBI’s view was over and above the statutory limits of ₹20,000 as per the Income Tax Act.

Despite these clarifications, some analysts flag two big challenges for the company. First, no disbursal of new gold loans implies that profitability growth of IIFL will be challenged. Gold loans are the second-biggest business division, totalling 32%, just a shade less than 33% of home loans offered by IIFL Finance, as of 31 December 2023.

Second, capital raising plans as shared by the management could take a hit.

“Investors are worried about how pervasive this practice was across the company or if it was limited to some branches. Regardless, when you cannot do new business for one of the largest and fastest growing business units, then it is a no-brainer that overall growth and profitability will be hit,” said a Delhi-based executive with an alternate finance firm requesting anonymity.

For now, IIFL maintains it does not envisage any liquidity issues and there would be no major impact on profitability.

Jain and R. Venkataraman, joint managing director of IIFL Finance, are promoters of the company, owning 24.8% while institutional investors own 54% and retail investors, 21.2% at the end of December. Fairfax and Capital Group are the biggest institutional investors with 15.1% and 7.9%, respectively.

Sapno Ko Sach Karne Ka Seedha Raasta (the right path to make dreams come true) are the opening lines of IIFL Finance’s annual report for 2022-23.

As the financial year ends, many investors and customers are wondering whether IIFL Finance has fallen short of its promise.

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Published: 05 Mar 2024, 10:31 PM IST