Shares of IIFL Finance dropped 20% after the Reserve Bank India (RBI) instructed the company to cease sanctioning and disbursing new gold loans immediately due to significant supervisory concerns in the company’s gold loan portfolio.

The RBI has inspected IIFL Finance Ltd.’s financial position as of March 31, 2023, and several concerns were found. The central bank has also prohibited the assignment, securitisation, or sale of any of its gold loans. The Non-banking financing company (NBFC) can only continue to service its existing gold loan portfolio through the usual collection and recovery processes.

The RBI found serious issues with IIFL Finance’s gold loan practices, including deviations in assaying and certifying the purity and net weight of the gold during the loan sanctioning process and at an auction upon default. There were also breaches in the loan-to-value ratio, significant dispersal and collection of loan amounts in cash that exceeded the allowed limit, and non-adherence to standard auction processes. Additionally, the bank found a lack of transparency in charges being levied to customer accounts.

These practices are regulatory violations that adversely impact customers’ interests, leading to restrictions. However, the Reserve Bank of India will review these actions after completing a special audit that has been instituted by the RBI. After the company rectifies the audit findings and the Reserve Bank’s inspection, to the RBI’s satisfaction, the restrictions will be lifted.

In response to the restrictions, IIFL Finance reaffirmed its commitment to rectifying the Reserve Bank’s observations in its gold loan portfolio and complying with the RBI’s findings as soon as possible. The company intends to continue providing gold loan services in the interest of its customers.

IIFL Finance is one of India’s largest NBFCs for gold loans, representing nearly 32% of its total assets under management. The company claims to have over 19 lakh active customers in its gold loan segment. The gross bad loans in this portfolio were reported at 0.80%. Thus, the restrictions will have a considerable impact on IIFL Finance.

At 12:32 pm, IIFL Finance Ltd.’s shares were trading 20% lower, in an intraday lower circuit, at Rs 477.75 on NSE.