Midcap Stock Sunks 20% At Open After Regulatory Action

Shares of IIFL Finance cratered at open to hit the lower circuit after the firm was barred from dealing in fresh gold loans by India’s central bank.

What Happened: The Reserve Bank of India (RBI) on Monday directed IIFL Finance to halt the sanctioning and disbursement of gold loans due to “material supervisory concerns” identified in the non-bank financier’s gold loan portfolio.

The RBI highlighted lapses, including regulatory violations, observed during an inspection of the company’s financial position as of March 31, 2023. Serious deviations were found in the assaying and certification of gold used as collateral for loans and during auctions upon default.

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What Went Wrong: According to the central bank, IIFL Finance violated the maximum allowed loan-to-value ratio, exceeded permitted cash collections, failed to adhere to the standard auction process, and lacked transparency in its fee structure.

Despite the imposed restrictions, the company is permitted to continue servicing its existing gold loan portfolio through regular collection and recovery processes.

The RBI said it has engaged with the senior management and statutory auditors of IIFL Finance regarding these deficiencies over the past few months. However, no significant corrective action was allegedly taken, leading to the imposition of business restrictions in the interest of customers.

The regulatory restrictions will be reassessed after the RBI conducts a special audit and after the company rectifies the audit findings and the RBI inspection findings to the regulator’s satisfaction.

Price Action: IIFL Finance’s share price fell 20% to ₹477.75 immediately at the start of trade on Tuesday, its lowest since June 2023.

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