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RBI bars IIFL Finance from sanctioning, disbursing gold loans

RBI bars IIFL Finance from sanctioning, disbursing gold loans

No one asks a banker in good time, and then no one leaves a banker in bad time. Regulatory authorities are best known for coming at a time when a collapse has happened or is about to happen, but the RBI, being a regulator, has been giving hard times to companies even when the overall economy is in good shape. In recent times, we have witnessed two big names coming under the RBI radar in the public limelight: Paytm, JM Financial Products Limited, and IIFL Finance Ltd.

Recently, the Reserve Bank of India (RBI) imposed restrictions on IIFL Finance from sanctioning or disbursing gold loans due to material supervisory concerns in its gold loan portfolio. According to the circular, RBI carried out an inspection with IIFL Finance with reference to its financial position as of March 31, 2023. The findings of the report state certain material supervisory concerns in the gold loan portfolio of the company, including serious deviations in assaying and certifying the purity and net weight of the gold at the time of loan sanction. The RBI found discrepancies regarding breaches in the loan-to-value ratio, significant disbursal and collection of loan amounts in cash far in excess of the statutory limit, non-adherence to the standard auction process, and lack of transparency in charges being levied on customer accounts, etc.

Despite the RBI's engagement with senior management, no meaningful corrective action has been evidenced so far. However, RBI has allowed the company to continue to service its existing gold loan portfolio through the usual collection and recovery processes.

The RBI's restriction on gold loans is expected to dent the company’s earnings due to the rapid unwinding of the profitable gold loan book, even as the timing of the lifting of the ban remains uncertain. Erosion in expectations can be seen through the stock price movement, which has witnessed a price erosion of around 40% in two sessions. Following the incident, the Company clarified that these are operational issues that will be addressed with utmost sincerity and is taking immediate and comprehensive steps to resolve this issue.

On Mar 6th, RBI barred JM Financial Products Ltd. from advancing loans against shares and debentures, citing regulatory and governance lapses. The RBI has asked JM Financial Products to cease financing against shares and debentures, citing the company's repeated assistance in helping customers bid for various IPO and NCD offerings using loaned funds.

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