Special audit by RBI on necessary measures taken to address regulatory issues: IIFL Finance

Non-banking finance company IIFL Finance on June 15 said that a special audit of its books had been initiated by the Reserve Bank of India (RBI) following actions announced in early March and that the company had taken necessary measures to address the regulator’s concerns.

The special audit report has been sent to the RBI and the regulator will now ask the authorities to review the business restrictions imposed. According to the company’s communication to stock exchanges, IIFL Finance has taken necessary actions to resolve the identified issues.

Moreover, to prevent their recurrence, the management board is establishing a team to implement corrective actions and review these deviations and non-compliances, the company said.

“The board is confident that these actions will resolve all issues raised by the RBI,” the company said.

To mitigate the company’s ongoing risks, IIFL Finance has raised capital of Rs 1,271.3 crore through rights issue, secured Rs 500 billion through NCD investment from long-term investors and implemented cost control measures, including reduction in core discretionary expenses, the company added.

“These actions ensure that the company’s projected cash flows for the next three years meet its financial obligations while maintaining solid capital adequacy,” the company said, adding that the board is confident of resolving all issues raised by the RBI and has prepared the financial statements on an continuation of business.

Moreover, while the gold lending business is the core segment of the stand-alone company, the group’s consolidated business benefits significantly from other businesses, the company said.

RBI observations

In a significant regulatory action, the RBI on March 4 asked IIFL FInance to stop sanctioning or disbursing gold loans with immediate effect after noting certain significant supervisory concerns regarding the company’s gold loan portfolio.

“The Reserve Bank of India, today, in exercise of its powers under Section 45L(1)(b) of the Reserve Bank of India Act, 1934, has directed IIFL Finance Ltd. to desist, with immediate effect, from sanctioning or disbursing gold loans or assignments/ securitization/sale of any of its gold loans,” the RBI said in a press release.

Explaining its action, the central bank said the RBI had conducted an audit of the company with respect to its financial position as on March 31, 2023, which revealed that certain significant supervisory concerns were observed in the company’s gold loan portfolio.

These include serious deviations in marking and confirming the purity and net weight of gold at the time of lending and at the time of auction in the event of default, loan-to-value (LTV) violations, significant disbursement and recovery of a loan amount in cash well in excess of the statutory limit, it said R.B.I.

Moreover, the RBI inspection revealed further non-compliance with the standard auction process and lack of transparency regarding fees charged on customer accounts etc., the central bank said. “These practices, apart from being in violation of regulations, also have a significant and adverse impact on the interests of customers,” the RBI said.

The company’s gold loan book in the October-December quarter increased to Rs 24,692 crore as on December 31. It was up 35 percent year-over-year and 4 percent quarter-over-quarter.

The company provides gold loan through 2,721 cities across 25 states and 4 union territories to salaried, self-employed and small and medium enterprise customers.

The share of the company’s gold loan portfolio is 32 per cent of total assets under management (AUM) in the October-December quarter. According to the company’s presentation to investors, the portfolio’s profitability was 19%.

In the October-December quarter, the total gross non-performing assets (NPA) gold loan ratio was 0.80%. as of December 31, 2023. In the October-December quarter, the company’s net profit increased by 30%. year to Rs 490.4 crore.

In recent months, the RBI has taken action against a number of financial institutions, including JM Financial Products Ltd, payments bank Paytm and Edelweiss group entities, citing various regulatory violations, stepping up scrutiny of financial services companies.

Shares of IIFL FInance closed at Rs 466.40, down 1.26 per cent, on the BSE on June 14, while the benchmark equity index Sensex closed marginally at 76,992 points.