IIFL Finance hits 20% lower circuit after RBI order

IIFL Finance Ltd shares tanked 20% lower circuit on Tuesday after the Reserve Bank of India (RBI) asked the company to stop issuing gold loans with immediate effect.

The shares of the non-banking financial company (NBFC) opened lower at ₹498.50, down 20% as compared to the previous session close, reducing the company's m-cap to ₹18,253.97 crore. With this development, shares of IIFL Finance have plunged 21.35% in the last week. Shares have seen 19.57%, 20.67%, and 20.74% drop in the past one month, six months and year-to-date period, respectively.

The sharp fall in the share price of IIFL Finance came following the RBI’s order against the Mumbai-based financial services company, which said it must stop sanctioning and disbursing gold loans with "immediate effect". The RBI raised material supervisory concerns in IIFL Finance’s gold loan portfolio.

The company can, however, continue to service its existing gold loan portfolio through the usual collection and recovery processes.

The RBI said in its inspection concerning IIFL Finance’s financial position as of March 31, 2023, it found “material supervisory concerns” in its gold loan portfolio. These issues included serious “deviations in assaying and certifying purity”, and the “net weight of the gold at the time of sanction of loans and at the time of auction upon default; breaches in loan-to-value ratio; significant disbursal and collection of the loan amount in cash far over the statutory limit; non-adherence to the standard auction process; and lack of transparency in charges being levied to customer accounts, etc”.

According to the central bank, these practices, apart from being regulatory violations, also “significantly and adversely” impact the interest of the customers.

The RBI says these supervisory restrictions will be reviewed upon completion of a special audit to be instituted by it. The RBI will await the company to rectify the special audit findings and its own inspection to its satisfaction before removing restrictions.

The RBI's action against IIFL Finance comes close on the heels of its recent stringent action against Paytm Payments Bank.

IIFL Finance’s Q3 FY24 profit grew 30% YoY to ₹490 crore, while its 9M FY24 profit increased 28% YoY to ₹1,390 crore. The company’s NII grew 45% YoY to ₹1,570 crore, while non-interest income stood at ₹110 crore, down 55% YoY, due to lower assignment and fee income.

Brokerage major Motilal Oswal, in its latest report on IIFL Finance on January 19, 2024, had recommended a "BUY" rating on the story, with a target price of ₹800, an upside of 25% then. "We estimate AUM CAGR of ~25% over FY23-26," the brokerage said.

IIFL Finance, together with its subsidiaries – IIFL Home Finance Ltd, IIFL Samasta Finance Ltd and IIFL Open Fintech Private Ltd, provides a range of loans and mortgages, including home loans, gold loans, and business loans, among others. The company has around 2,600 branches across 500 plus cities.