The Reserve Bank of India (RBI) has barred IIFL Finance from sanctioning and disbursing gold loans due to ‘material supervisory concerns’ in the NBFCs portfolio.

The non-banking financial company (NBFC) cannot also securitise or sell any of its gold loans, as per the RBI directive.

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

According to the RBI, the regulatory violations adversely impact the interest of the customers.

During the inspection, the RBI found 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. 

The RBI also noticed violations in the maximum allowed loan-to-value ratio which amounted to significant disbursal and collection of loan amount in cash far in excess of the statutory limit. The company also failed to adhere to the standard auction process and lacked transparency in the fees charged to the customers.

“These practices, apart from being regulatory violations, also significantly and adversely impact the interest of the customers,” the RBI said. 

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 said.

The RBI had carried out an inspection of the company regarding its financial position as on 31 March 2023.

"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," it said.

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 action was taken under Section 45L(1)(b) of the Reserve Bank of India Act, 1934.

As of 31 December 2023, IIFL Finance's gold loan book was worth Rs 24,692 crore, making up nearly 31% of its total portfolio.