Fairfax shores up IIFL Finance’s liquidity after RBI gold loan ban

Two days after the Reserve Bank of India (RBI) pulled up non-banking financial company IIFL Finance Ltd over discrepancies in its gold loan portfolio and barred it from disbursing gold loans, major shareholder Fairfax India Holdings Corp. stepped in to shore up its liquidity by about $200 million.

Shares of IIFL Finance, which had plunged about 35% over two days since the RBI rap on Monday, had surged about 10% at 11.10am on Thursday, 7 March, following Fairfax’s move to infuse liquidity.

In a note to the exchanges, IIFL Finance said the RBI’s embargo had raised liquidity concerns among investors and lenders.

In response to these concerns, Fairfax India has agreed to invest up to $200 million of liquidity support on terms to be mutually agreed and subject to applicable laws, including regulatory approvals, if any, it said.

“We have been long-term investors in the IIFL group of companies and have full trust and confidence in the company’s strong management team led by Nirmal Jain and R. Venkataraman. We are confident that Nirmal and Venkat will take corrective actions to meet and exceed RBI’s compliance standards,” said Prem Watsa, chairman of Fairfax India, said in the statement.

“At this crucial juncture, Fairfax India’s and Prem’s generous offer to provide liquidity support is very timely and motivating. We are committed to complying fully with RBI’s directives and growing the business under the regulator’s guidance on the strong foundation of compliance, risk management, and fair practices,” Nirmal Jain, managing director and founder of IIFL Finance, said in the statement.

In its directive issued on Monday, 4 March, the banking regulator told IIFL Finance “to cease and desist, with immediate effect, from sanctioning or disbursing gold loans or assigning, securitizing or selling any of its gold loans.”

The company can, however, continue to service its existing gold loan portfolio through usual collection and recovery processes, RBI said.

The Reserve Bank said it had inspected the NBFC’s books based on its financial position as on 31 March 2023.

“Certain material supervisory concerns were observed in the gold loan portfolio of the company, including serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default,” RBI said.

In addition, it said it also found “breaches in loan-to-value ratio; significant disbursal and collection of loan amount in cash far in excess of the statutory limit; non-adherence to the standard auction process; and lack of transparency in charges being levied to customer accounts.”

The regulator further said that these practices, apart from being regulatory violations, also significantly and adversely impact the interest of the customers.

“Over the last few months, RBI has been engaging with senior management and statutory auditors of the company on these deficiencies; however, no meaningful corrective action has been evidenced so far, necessitating the imposition of business restrictions with immediate effect, in the overall interest of customers,” it added.