IIFL’s gold book could run down in next 2-3 quarters if RBI’s restrictions prolong: CARE Ratings

CARE Ratings has cautioned that if the Reserve Bank of India’s restrictions on IIFL Finance Ltd (IIFL) prolong, its gold book is expected to run down in the next 2-3 quarters.

Gold loans constituted about 79 per cent of the non-banking finance company’s standalone Assets Under Management (AUM) of ₹31,430 crore as on December-end 2023.

These loans constituted about 32 per cent of IIFL’s consolidated AUM (of ₹77,444 crore) as on December 31, 2023. IIFL’s standalone AUM

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“The continuation of the restriction on gold loan segment is expected to have negative impact on the overall liability franchise across segments with moderation in its financial flexibility,” the agency said.

CARE Ratings revised the credit watch on the ‘AA’ ratings on IIFL’s various long-term debt instruments and bank facilities from “Rating watch with developing implications” to “Rating watch with negative (RWN) implications” .

The rating of IIFL’s subsidiary IIFL Home Finance Ltd has also been revised from “Rating watch with developing implications” to “Rating watch with negative implications”.

The rating agency attributed the revision in the credit watch of IIFL and IIFL Home Finance to continued uncertainty on the restoration of gold loan operations of IIFL with uncertainty on the timelines for completion of the scheduled special audit which is to be done as per RBI’s directive.

This follows the RBI order dated March 4, 2024, which directed IIFL to cease and desist, with immediate effect, from sanctioning or disbursing gold loans or assigning/ securitising/ selling any of its gold loans, per the rating agency’s statement.

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CARE Ratings has outstanding “AA” rating on IIFL’s long-term bank facilities (₹400 crore), long-term instruments (₹100 crore) and non-convertible debentures/NCDs (₹537.50 crore). It also has an outstanding ‘AA’ rating on IIFL Home Finance’s NCDs (₹17 crore).

Securities with ‘AA’ rating are considered to have a high degree of safety regarding timely servicing of financial obligations. Such sec urities carry very low credit risk.

The agency noted that it has taken into account the RBI’s special audit tender notification dated March 22, 2024, as per which the selection of the auditor for the special audit will be done by April 12, 2024.

However, the timelines for completion of the process along with the final outcome of the special audit remains uncertain and will remain a key monitorable, it added.

CARE said it will continue monitor the impact of these developments on the business operations of IIFL and IIFL Home Finance, liability franchise and liquidity profile.

It will also continue to monitor the progress on the scheduled special audit and the course of action taken by the company including the required corrective steps.

The agency said it has also taken note of ₹500 crores raised by IIFL through NCDs in March 2024 and the proposed rights issue plan of ₹1,500 crores which is expected to get completed by mid-May 2024.

This along with the collection on the gold loan book as it runs down, is expected to help the company in maintaining healthy liquidity, it added. IIFL Finance is a listed holding NBFC with 2 major subsidiaries for housing & Micro-finance.

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