The Reserve Bank of India (RBI) has imposed severe restrictions on IIFL Finance, one of the leading non-banking financial companies (NBFCs) in the country, for its irregularities in the gold loan portfolio. The company has been barred from sanctioning or disbursing fresh gold loans, or selling its existing gold loans to other lenders, with immediate effect.
What are the regulatory violations?
According to RBI, the company had violated several regulatory norms, such as:
- Granting more loans than what the collateral permitted: The company appeared to be lending more money than what the value of the gold pledged by the customers allowed, exposing itself and the customers to higher risks.
- Deviating from the standard procedure of assaying and certifying the purity and net weight of the gold: The company did not follow the proper method of testing and verifying the quality and quantity of the gold at the time of sanctioning loans and at the time of auctioning the gold upon default, which could lead to fraud and loss for both parties.
- Breaching the maximum loan-to-value ratio: The company exceeded the limit of lending up to 75% of the value of the gold, as prescribed by RBI, which could result in over-indebtedness and default by the customers.
- Disbursing and collecting loan amounts in cash over the statutory limit: The company violated the rule of not giving or taking more than Rs 20,000 in cash for any transaction, which could enable money laundering and tax evasion.
- Lacking transparency in charges being levied to customer accounts: The company did not disclose clearly the fees and charges that it applied to the customer accounts, such as processing fees, interest rates, penal charges, etc., which could mislead and exploit the customers.
Why did RBI take this action?
“These practices, apart from being regulatory violations, also significantly and adversely impact the interest of the customers,” RBI said in a press release.
RBI said that it had been engaging with the senior management and the statutory auditors of the company over the last few months, but no meaningful corrective action had been taken by the company. Therefore, RBI decided to take this drastic action to protect the interests of customers.
What are the implications for IIFL Finance?
The restrictions will be reviewed after a special audit by RBI and after rectification by the company of the audit findings and the inspection findings, to the satisfaction of RBI.
IIFL Finance had a gold loan portfolio of Rs 24,692 crore as of December 2023, accounting for 32% of its loan book. The company’s chairman Nirmal Jain called RBI’s action “a little harsh” and said that there were “no governance issues” in the company.
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