Is the coast clear for IIFL Finance?

Investors in IIFL Finance Ltd have found some relief following the completion of the Reserve Bank of India’s (RBI) special audit. However, the damage to the company’s Q4FY24 earnings and brand image has already been done. 

The RBI had observed several regulatory breaches in IIFL’s gold loan portfolio, which comprised 30% of its consolidated assets under management (AUM) for FY24. Consequently, the regulator had imposed an immediate ban on the company from sanctioning and disbursing new gold loans effective 4 March 2024.

In Q4FY24, IIFL’s gold loan AUM declined 5% sequentially to 23,354 crore, a drop that was expected as new lending ceased. The period also saw a significant rise in non-performing gold loan assets from 0.8% to 3.8%, likely due to hampered recovery efforts from restrictions on cash repayments and auction procedural issues. Recall that RBI’s main concerns were regarding the disbursement and collection in cash exceeding statutory limit under the Income Tax Act, procedural shortcomings in gold auctions in cases of default, and a lack of transparency in customer charges.

The company’s compliance with regulatory requirements is under review by the RBI, and IIFL management anticipates positive feedback. However, there is no clear timeline for the resumption of gold lending operations. During an earnings call, IIFL management refrained from providing AUM growth guidance for FY25, emphasizing a focus on compliance and risk control. Consequently, earnings from gold lending are expected to remain subdued in Q1FY25.

IIFL’s diversification strategy, meanwhile, has provided some cushion against the impact of the RBI’s ban. Its microfinance and home finance segments significantly contributed to the consolidated net profit for FY24, mitigating the adverse effects on the gold loan business.

IIFL Home Finance maintained its contribution to group net profit at levels similar to FY23. However, IIFL Samasta Finance, the company’s microfinance arm, increased its net profit contribution from 8% to 25% year-on-year. 

Notably, the return on assets (RoA) for microfinance lending was highest at 5%, followed by home finance at 4.4% and IIFL standalone (including gold loan business) at 2.3%. The low RoA of the gold loan business is dampening overall return ratios, and asset quality trends across segments will need close monitoring.

IIFL shares have risen 13% this month, reacting positively to the conclusion of the RBI’s special audit announced on 4 June. Nevertheless, in the current calendar year so far, the stock is down 19%. As things stand, a swift turnaround in stock performance seems unlikely.


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