IIFL Finance is facing a liquidity crunch as banks have turned cautious while lending to it following a clampdown on the non-bank lender's gold loan business, a senior official and two bankers told Reuters.

"Banks are neither sanctioning new lines (of credit) nor disbursing from already sanctioned limits," the official at the company, who did not want to be named, said.

Banks have stopped lending to IIFL Finance's gold and other businesses, the official said, adding that the impact of the curbs on the overall business is likely to be around INR 500 crore (USD 60 million).

In early March, the Reserve Bank of India (RBI) ordered IIFL Finance to stop sanctioning, disbursing and selling gold loans, citing "material supervisory concerns" in its gold loan portfolio.

Soon after the curbs, IIFL Finance cancelled a proposed USD 400 million bond fundraising plan.

Its top shareholder Fairfax India agreed to provide up to USD 200 million in liquidity support to assuage liquidity concerns. The company has since raised INR 500 crore through bonds and is looking to raise INR 1,272 crore through a rights issue of shares.

"Banks are currently in a wait-and-watch mode and are waiting for the regulatory dust to settle before taking on more exposure," an official with a state-run bank said.

"While co-lending should automatically restart once the RBI ban is lifted, we are staying away from term loans at present."

Banks lend funds jointly under a co-lending arrangement to spread the credit risk. As of December 31, 57% of IIFL Finance's total borrowing was from banks.

IIFL Finance had unencumbered cash and liquid balance of around INR 4,035 crore on as on March 5, as per rating agency ICRA.

"The drawdown in liquidity is faster-than-expected as other businesses of the company also have to survive," the company source said.

The second banker said it wants to avoid lending to an entity that is under the regulator's lens. "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," the banker said.

On March 4, the Reserve Bank had ordered the company majority owned by the Indian-origin Canadian businessman Prem Watsa to stop sanctioning, disbursing and selling new gold loans, citing "material supervisory concerns" in its gold loan portfolio.

The RBI bank NBFC had around INR 1,200 crore of line of credit sanctioned and since then, it could draw down only around INR 570 crore.

IIFL Finance is the second largest gold loan player after Muthoot Finance, with an AUM of INR 24,692 crore at the end of December 2023. Its gold loan book has grown at a CAGR of 39% between 2019 and 2023.

Since the pandemic it has been growing faster and has doubled the branch strength to over 2,700 and serves 56 lakh customers.

The gold loan vertical is the second largest for IIFL with around INR 24,692 crore of AUM as of December 2023 after the home loan vertical, which is about INR 30,000 crore, but is the most profitable arm of the group founded by Nirmal Jain also runs a successful microfinance arm with around INR 15,000 crore of AUM with INR 500 crore of net income in the December quarter. But as much as 57% of the gold loan book is the co-lending model.

Its top shareholder Fairfax India agreed to provide up to USD 200 million in liquidity support to assuage liquidity concerns. The company has since raised INR 500 crore through bonds and is looking to raise INR 1,272 crore through a rights issue. The group employs around 40,000 of them 15000 are in the gold loan business.

Article Source – Reuters, The New Indian Express