On March 5, shares of gold mortgage lenders Manappuram Finance Ltd and Muthoot Finance Ltd experienced significant surges, climbing by up to 14%. This surge came in response to the Reserve Bank of India (RBI) imposing restrictions on competitor IIFL Finance due to material supervisory concerns related to its gold loan portfolio.
Following the central bank’s action, shares of IIFL Finance plummeted, hitting the 20 percent lower circuit on March 5. In contrast, Manappuram Finance witnessed its most substantial single-day gain since September 2020 on an intraday basis. Although the stock later pared some gains, it still traded 4 percent higher at Rs 192 on the NSE.
Meanwhile, Muthoot Finance experienced its most significant surge since June 2020, marking the fifth consecutive day of gains. As of 10:58 am, Muthoot Finance shares were trading at Rs 1,398.05, up 4 percent from the previous close.
The Reserve Bank of India (RBI) identified significant irregularities in IIFL Finance’s gold loan portfolio, particularly concerning deviations in the assaying and certification of gold purity and net weight at the loan sanctioning stage and during auction proceedings in case of defaults.
During a conference call, IIFL Finance addressed the impact of the RBI restrictions, reassuring investors that near-term profitability wouldn’t be significantly affected. The company clarified that the RBI’s report didn’t highlight any governance or KYC-AML issues.
Furthermore, IIFL Finance affirmed that its recovery process remained intact, emphasizing that there were no restrictions on auctioning gold for recovery purposes. The company also expressed its intention to promptly submit a compliance report to the RBI.
Motilal Oswal views this as a major setback for IIFL Finance, given that gold loans constitute 32 percent of its Assets Under Management (AUM) mix. However, since the issues are process-related, the company can collaborate with the regulator to address the observations in its gold loan portfolio.
On the other hand, Jefferies has maintained a ‘buy’ rating on IIFL Finance with a target price of Rs 765 per share. The brokerage acknowledges that the RBI restrictions, subject to review after a special audit and rectification process, may adversely affect earnings, particularly through the unwinding of gold loans. Jefferies estimates that if the ban on gold lending persists for nine months, IIFL Finance’s EPS impact could exceed 25-30 percent, potentially leading to a decline in co-lending income and an increase in the cost of funds.
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