RBI bars IIFL Finance from disbursing gold loans with immediate effect; shares locked in 20% lower circuit

livemint.com:

₹478.50 on Tuesday after the Reserve Bank of India (RBI) barred IIFL Finance from sanctioning and disbursing gold loans with immediate effect on certain material supervisory concerns. "The Reserve Bank of India, in the exercise of its powers under Section 45L(1)(b) of the Reserve Bank of India Act, 1934, directed IIFL Finance Ltd to cease and desist, with immediate effect, from sanctioning or disbursing gold loans or assigning/ securitising/ selling any of its gold loans," the RBI said in a press release.

Issuing a clarification on the action, IIFL Finance said, "We reaffirm our commitment to rectify observations of the RBI in the gold loan portfolio to comply with RBI findings at the earliest and will continue with our endeavor to provide gold loan services in the overall interest of customers". Following the recent action by the Reserve Bank of India (RBI), Jefferies has decided to uphold its 'buy' recommendation on IIFL Finance, setting a target price of ₹765 per share.

However, the RBI's imposition of restrictions, pending a special audit and rectification process, could potentially impact the company's earnings negatively. This impact is particularly concerning due to the unwinding of gold loans, which make up 32 percent of IIFL Finance's Assets Under Management (AUM), according to the brokerage.

The imposed limitations could result in a reduction in co-lending income and a potential rise in the cost of funds for IIFL Finance. According to Jefferies' analysis, if the ban on gold loans continues for nine months, it could have a significant impact on the company's earnings per share (EPS), with estimates suggesting a potential decline of 25-30 percent.