Non-bank lender IIFL Finance Ltd. might see a rating downgrade owing to a ban by the Reserve Bank of India from March. Delays in removal of RBI restrictions on its gold loan business will likely lead to the company's rating being brought down by a notch, people in the know said.
According to the people quoted abvoe, ratings agencies have a AA rating on IIFL Finance, which may be downgraded to AA-, the people quoted above said. A rating review was conducted a few days ago, the people said.
A rating downgrade can severely impact non-bank companies since borrowing cost is linked to such ratings.
On March 4, the banking regulator restricted IIFL Finance from lending against gold with immediate effect, after it noted compliance issues. The issues which RBI noted, included serious deviations in assaying and certifying purity and net weight of the gold; breaches in loan-to-value ratio; significant disbursal and collection of loan amount in cash far in excess of the statutory limit.
According to the people quoted above, IIFL Finance has addressed the issues highlighted by the RBI in its supervisory review and has submitted a compliance report last month. However, it is yet to hear back from the regulator.
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As of Aug. 5, IIFL Finance's gold loan portfolio had dropped to Rs 12,162 crore, compared with over Rs 26,000 crore as of March 31, the company had disclosed in its last investor presentation.
With a high run-off factor and lack of new business, the company may see the gold loan segment completely go away from its overall business. As of June 30, IIFL Finance's assets under management were at Rs 69,610 crore, compared with Rs 78,960 crore as of March 31, 2024. The lack of gold loans may also impact IIFL Finance's yield on advances and the overall quality of the loan book, the people quoted above said.
At the end of the first quarter, IIFL Finance reported 19.6% yield on gold loan advances. The company's cumulative yield on advances was at 16.9%.
In addition to the business impact, the company will also need to lay off employees working in the gold loan business. Currently, in its 2,775 branches, there are about four or five gold loan linked employees at the company.
A large chunk of these employees will need to be laid off if the restrictions are not lifted soon, the people quoted above said. IIFL Finance is already in the process of laying off employees in unprofitable centres, they said.
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