IIFL Finance’s shares down on RBI imposing ban on gold lending

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IIFL Finance Ltd.’s shares were down by 5.70 per cent to ₹396.45 at 11.34 am on the BSE, after the Reserve Bank of India (RBI) placed a ban on gold lending, impacting the operations and profitability of the company.

This move comes in response to observed deviations in gold appraisal and certification of purity, as well as breaches in loan-to-value (LTV) ratios, raising concerns about the integrity of gold loan transactions.

IIFL Finance addressed the issue during a conference call held on March 5th, 2024, shedding light on the corrective measures taken to rectify the concerns raised by the RBI. However, the duration for which the ban will remain in effect remains uncertain, posing challenges for the company’s growth trajectory and financial performance.

The ban’s duration and potential impact on IIFL Finance’s gold loan growth are difficult to predict. Analysts suggest that it may take approximately six months for the RBI to conduct a special audit and address the regulatory concerns satisfactorily. As a consequence, earnings per share (EPS) estimates for FY24, FY25, and FY26 have been revised downwards by 2 per cent, 14 per cent, and 15 per cent, respectively.

According to a report by Motilal Oswal, while the ban’s impact on IIFL Finance’s financials remains contingent on its duration, the company emphasizes its commitment to addressing the RBI’s concerns and restoring operational normalcy. However, risks loom large, including a potential erosion of the gold loan portfolio and employee attrition if the ban persists.

In response to these challenges, IIFL Finance’s stock witnessed a sharp decline, falling by 5.67 per cent. Despite near-term uncertainties and price volatility, analysts maintain a BUY rating on the stock, reaffirming confidence in the company’s long-term prospects. An intrinsic value assessment based on a sum-of-the-parts (SOTP) analysis yields a target price of ₹560, factoring in the revised outlook for its standalone, housing finance, and microfinance businesses.