Despite the government’s efforts to boost the MSME sector through various schemes, micro and small enterprises continue to face significant challenges in securing financing. Recently, the Reserve Bank of India (RBI) increased scrutiny over gold loan NBFCs, citing “material supervisory concerns.” As a result, many small businesses are struggling to secure financing. In particular, the RBI’s ban on IIFL Finance’s gold loan business has left micro and small borrowers with no choice but to turn to moneylenders, who charge up to 60% interest per annum.
IIFL Finance, which claims to serve 60 lakh customers, primarily small entrepreneurs from unbanked and underbanked segments, was debarred from disbursing new loans on March 4, 2024, due to procedural violations. This ban on IIFL Finance, the second-largest gold loan non-bank financier in India, has had a crippling effect on small businesses across 1,000 towns and villages where IIFL operated through its 2,700 branches, employing over 15,000 people.
While the government introduces several schemes for MSMEs and the RBI, along with PSU banks, works overtime to increase credit penetration, the sudden unavailability of affordable loans from IIFL has pushed entrepreneurs back into the clutches of unregulated moneylenders. Small shopkeepers and traders in tier-3 areas found it easy to secure finance from IIFL Finance, but now they face challenges in the absence of other financing options. This situation is forcing them to avail loans at much higher interest rates from moneylenders.
Even small-ticket loan borrowers living in cities like Delhi say they felt secure taking loans from IIFL gold loan. However, with IIFL no longer an option, they now have to take loans from other sources at much higher interest rates.
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Gold loans have been a major source of credit for small entrepreneurs in rural and semi-urban India, where formal banking access is limited. Gold loan NBFCs like IIFL have been filling this credit gap through their extensive branch networks and strong local community connections, helping entrepreneurs avoid the debt traps set by unorganized moneylenders.
Niloy Ghosh, Head of IIFL Finance Gold Loan business, stated, “We receive thousands of queries daily from customers for loans, but since we cannot provide due to the regulatory ban, we try to connect them with regulated banking or non-banking institutions. However, in many areas where such institutions are not present, small entrepreneurs have to turn to moneylenders charging exorbitant rates of interest. But we are trying our best to guide them to avoid such traps. It is our moral responsibility.”
The RBI banned IIFL Finance’s gold loan business in early March 2024 for process-related lapses, including issuing cash loans exceeding Rs 20,000. The RBI later found this to be an industry-wide practice and issued a notification to all gold loan companies to cease such practices in early May 2024. An RBI-appointed auditor completed a special audit on IIFL in April, with the report submitted in early June. The RBI is expected to decide on future course of action based on this report. Meanwhile, NITI Aayog and many government authorities have emphasized the urgent need to ensure that vulnerable small entrepreneurs should not fall into the clutches of predatory moneylenders.