RBI to start special audit for IIFL Finance, JM Financial Products from April 12 (2024)

The Reserve Bank of India (RBI) will start special audits of non-banking finance companies (NBFCs) IIFL Finance and JM Financial Products Ltd on April 12. The central bank has called for tenders for the appointment of auditors to conduct the special audits.

Moneycontrol has reviewed the copy of the tenders.

In the case of IIFL Finance, the special audit is that of the gold loan book of the company.

The RBI had said that due to supervisory concerns they are stopping issue of fresh gold loans by IIFL Finance and added that they will conduct a special audit to see compliance to the queries they had raised in their regular audit.

RBI action:

The RBI audit is following a recent regulatory action. On March 4, the RBI had asked IIFL Finance to stop sanctioning or disbursing gold loans with immediate effect after observing certain material supervisory concerns in the company's gold loan portfolio.

IIFL files compliance report to RBI:

Following the RBI action, IIFL had filed a compliance report to the central bank in the week ending March 8.

"Our responses to RBI were submitted within the stipulated time," said, AK Purwar, Chairman and Independent Director of IIFL Finance in response to Moneycontrol query.

RBI action on JM Financial Products Ltd

Further, the central bank had on March 5 barred JM Financial Products Ltd (JMFPL) from giving loans against shares and debentures, including sanction and disbursal of loans against Initial Public Offering (IPO) of shares, with immediate effect.

Announcing the decision, the RBI said the action has been taken after observing certain serious deficiencies in the financial services firm's loan process. More importantly, the central bank highlighted that there are serious concerns on the governance issues in the company, apart from violation of regulatory guidelines.

"This action is necessitated due to certain serious deficiencies observed in respect of loans sanctioned by the company for IPO financing as well as NCD subscriptions," RBI had said.

In IIFL's scenario, the central bank said an inspection of the company was carried out by the RBI with reference to its financial position as of March 31, 2023 which revealed certain material supervisory concerns were observed in the gold loan portfolio of the company.

These include 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, breaches in Loan-to-Value ratio (LTV), significant disbursal and collection of loan amount in cash far in excess of the statutory limit among others, the RBI said.

Further, the RBI inspection further revealed non-adherence to the standard auction process and lack of transparency in charges being levied to customer accounts, etc, the central bank said. "These practices, apart from being regulatory violations, also significantly and adversely impact the interest of the customers," the RBI said.

According to the central bank over the last few months, the RBI has been engaging with the senior management and the statutory auditors of the company on these deficiencies.

"However, no meaningful corrective action has been evidenced so far. This has necessitated the imposition of business restrictions with immediate effect, in the overall interest of customers," the RBI added.

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

These supervisory restrictions will be reviewed upon completion of a special audit to be instituted by the RBI and after rectification by the company of the special audit findings and the findings of RBI Inspection, to the satisfaction of RBI, the RBI added.

"This business restriction is without prejudice to any other Regulatory or Supervisory action, that may be initiated by the RBI against the company.," the RBI added.

IIFL Gold loan portfolio

The gold loan portfolio of the company in October-December quarter grew to Rs 24,692 crore as on December 31. It grew 35 percent on-year and 4 percent on-quarter.

The company provides gold loan through 2,721 towns/cities across 25 states and 4 Union Territories to salaried, self-employed and MSME customer segment.

The share of gold loan portfolio of the company is 32 percent of the total assets under management (AUM), in October-December quarter. The portfolio yield stood at 19 percent, as per company's investor presentation.

In October-December quarter, of the total gross non-performing assets (NPA) ratio, gold loans' ratio stood at 0.80 percent as on December 31, 2023.

In October-December quarter , net profit of the company rose 30 percent on-year to Rs 490.4 crore.

Shares of IIFL Finance last closed at Rs 334.25, down 0.36 percent, on BSE on March 22 while benchmark equity index Sensex closed at 72831.94 points, up 0.26%, while that of JM Financial closed 0.26 percent higher at Rs74 apiece.