Gold Gone Wrong: IIFL's Loan Halt And The Future Of Glittering Profits

Brief:
On 4th March, 2024, the Reserve Bank of India (RBI) imposed a ban on IIFL Finance, a major non-banking financial company (NBFC), from issuing fresh gold loans. This move by the regulator sent shockwaves through the financial sector, particularly impacting IIFL as gold loans are a significant part of their business.

Background:
IIFL Finance operates over 2,700 dedicated gold loan branches across India, catering to a large customer base.

The RBI's action stemmed from concerns regarding IIFL's gold loan practices, specifically:

Loan-to-value (LTV) ratio: The LTV ratio determines the maximum loan amount a borrower can receive against the pledged gold. There have been concerns about IIFL offering excessively high LTVs, increasing risk.

Cash component in disbursement: The RBI has suspected IIFL of disbursing a portion of the loan in cash, which is against regulations to prevent misuse of funds.

Financials and Impact:
Gold Loan Book FY18 FY23 Q3FY24 5yr CAGR
Assets under management 4,037 20,733 24,692 39%
AUM mix (%) 13.0% 32.1% 31.9%
Gold loans had emerged as the primary growth catalyst for IIFL in recent years, with its Assets Under Management (AUM) rising at a CAGR of ~40% over the past five years. The proportion of gold loans within the total AUM has also risen from 13% in FY18 to 32.1% in FY23. This ban is therefore going to have significant repercussions on the company's revenue.

As of 31st December, 2023, gold loans had an average yield of 19%, which is higher compared to its other businesses. Thus, the anticipated impact on profits is expected to be even more pronounced.

The impact on IIFL's stock price has been significant as it has lost >40% since the news broke, reflecting increased investor uncertainty.

Future Prospects:
The future trajectory for IIFL hinges upon the results of the RBI's special audit into its gold loan practices. Should the audit effectively identify and resolve any concerns, there's a possibility that the RBI could lift the