Mumbai, India – May 7, 2024 – Dark clouds are gathering over IIFL Finance, a prominent non-banking financial company (NBFC) in India. The company is facing a liquidity crunch after the Reserve Bank of India (RBI) imposed a clampdown on its gold loan business in early March 2024.

This reporter spoke with a senior official at IIFL Finance and two bankers familiar with the situation, all preferring to remain anonymous. Their accounts paint a picture of a company struggling to secure funding in the wake of regulatory scrutiny.

“Banks are neither approving new lines of credit nor disbursing from previously sanctioned limits,” revealed the IIFL Finance official. This cautious approach by banks has significantly impacted the company’s cash flow. The official estimates that the curbs on gold loans have resulted in a shortfall of around 5 billion rupees ($60 million).

Efforts to reach IIFL Finance for comment were unsuccessful as of this report’s filing.

RBI Clampdown on Gold Loans Triggers Liquidity Concerns

The RBI’s action stemmed from “material supervisory concerns” identified in IIFL Finance’s gold loan portfolio. This move sent shockwaves through the financial sector, raising questions about the company’s lending practices.

The immediate consequence was the cancellation of a planned $400 million bond issuance by IIFL Finance. This crucial fundraising avenue was shut down, further exacerbating the liquidity situation.

However, there was a glimmer of hope. Fairfax India, the company’s largest shareholder, stepped in to offer up to $200 million in liquidity support. Additionally, IIFL Finance successfully raised 5 billion rupees through bond sales and is pursuing a rights issue to raise another 12.72 billion rupees.

Banks in Wait-and-See Mode

Despite these efforts, banks remain hesitant to extend fresh lines of credit to IIFL Finance. An official from a state-run bank explained their cautious approach: “Banks are currently in a wait-and-watch mode, waiting for the regulatory dust to settle before taking on more exposure.”

This wait-and-see approach extends beyond gold loans. The banker further stated, “While co-lending should automatically restart once the RBI ban is lifted, we are staying away from term loans at present.” Co-lending arrangements, where banks partner with NBFCs to share credit risk, were a significant source of funding for IIFL Finance. As of December 31, 2023, banks accounted for 57% of the company’s total borrowings.

The bankers’ reluctance to lend is understandable considering the ongoing regulatory scrutiny. One banker, speaking on condition of anonymity, highlighted the importance of caution: “With the regulatory scrutiny on banks increasing, we would prefer to temporarily halt lending till we get clarity on how they sort out compliance-related issues and plan to restart the business.”

Can IIFL Finance Weather the Storm?

IIFL Finance entered this crisis with a relatively strong cash position. As of March 5, 2024, the company held an unencumbered cash and liquid balance of around 40.35 billion rupees, according to credit rating agency ICRA. However, a source within the company expressed concern: “The drawdown in liquidity is faster-than-expected as other businesses of the company also have to survive.”

The coming months will be crucial for IIFL Finance. The company’s ability to navigate the regulatory hurdles and regain the trust of banks will determine its financial health. With its planned fundraising initiatives and existing cash reserves, IIFL Finance has the resources to weather the storm. However, the success hinges on a swift resolution with the RBI and a clear path forward for its gold loan business.

Leave a Reply

Your email address will not be published. Required fields are marked *