With the Reserve Bank of India (RBI) lifting the restrictions on IIFL Finance’s gold loan business, experts and analysts said that the company is now expected to make a strong comeback in the gold lending business to regain its market share in the segment. “We believe that IIFL could even take pricing actions and compete aggressively (if needed) to accelerate its gold loan growth. While this could have some impact on the segment’s profitability in the near term, it will help IIFL regain its market share from its peers (like Muthoot Finance, Manappuram Finance) and even some banks,” Motilal Oswal Financial Services (MOFSL) said in a report.
IIFL’s gold loan AUM stood at approximately Rs 260 billion as of March 4, 2024, when the ban came into effect. It subsequently declined to around Rs 147 billion as of Jun 2024 and around Rs 122 billion as of August 5, 2024. Assuming that around 10 per cent of the outstanding gold loans run down every month, MOFSL expects IIFL’s gold loan AUM at approximately Rs 105 billion as of September 19, 2024, when the ban was revoked.
Meanwhile, a report by InCred Equities said that the lifting of the ban on gold finance business is surely a positive news for IIFL Finance but the incremental growth is expected to be less aggressive and in line with most peers as the company is obliged to follow best practices and norms to avoid any future problems from the regulator. “The gold finance book for the company witnessed a rampant growth of around 34 per cent CAGR over FY19 to Q3FY24, gaining a sizable market share from traditional gold finance companies like Muthoot Finance & Manappuram Finance. However, after the ban imposed in Mar 2024, the loan book declined by around 40 per cent from its peak of Rs 247 billion in Dec 2023 to Rs 147 billion in June 2024,” the report stated.
On September 19, the RBI lifted the restrictions on IIFL Finance’s gold loan business effective immediately, allowing the company to resume the sanctioning, disbursal, assignment, securitization, and sale of gold loans in compliance with all relevant laws and regulations. The RBI embargo on the company’s gold loan operations was in force for more than six months.
The comeback strategy
Following the RBI ban, a few media articles had suggested that IIFL could face a credit rating downgrade in the event of a delay by the RBI in lifting restrictions, and these concerns, MOFSL said, are now unfounded with credit rating agencies which had placed the company n Rating Watch (RW), expected to, at some stage, upgrading their credit rating outlook on IIFL.
During the gold loan ban period, IIFL did not close down any of its gold loan branches and did not terminate any of its employees. Instead, the company was slow in hiring and did not replace employees if there was any natural attrition at the relationship manager or feet-on-street level. The gold loan business continues to be led by Saurabh Kumar, who has been with the company for close to a decade. “IIFL has ensured that there is full compliance and all remedial actions have been taken, including all the directions in the master guidelines. It has also hired a few people at the CXO level and is in the process of hiring a few more, so that the risk, audit and compliance (entire risk assurance) functions are further strengthened,” stated the MOFSL report.
Furthermore, with key cities of Maharashtra, Pune and Nashik indicating that demand for gold loans is very strong amid the rise in top-up loans, buoyed by high gold prices, the recovery seems inevitable.
InCred Equities said, “Though there is a common belief that most lenders are getting cautious on personal unsecured loans, the gold loan business will benefit from the same. However, our discussion on the ground indicates the customer profiles for unsecured personal and gold loans are completely different, as the end usage of gold loans is relatively more certain. Also, the turnaround time for gold loan is far lower compared to personal loans due to lower underwriting formalities. So, the intersection between the two remains limited.”
To conclude, the brokerage firms said that gold lending is the flavour of the season and there will be benefits across parameters.