IIFL Finance Ltd. has decided to discontinue its top-up loans with immediate effect, Chairperson Arun Kumar Purwar, days after the RBI barred non-bank lender from disbursing gold loans.
"We have, of course, given loans on top of loans that are not against gold ornaments, but clean loans," Purwar told NDTV Profit's Sajeet Manghat on Wednesday in an exclusive interview. The total top-up loans make up 0.03% of the portfolio, he said.
The RBI barred IIFL Finance on Monday from sanctioning and disbursing gold loans with immediate effect. It has also been barred from assigning, securitising and selling any of its gold loans. The company can continue servicing its existing loans.
Purwar admitted that certain problems within the company existed while distributing gold loans, which account for 30% of its portfolio. As the internal auditors are conservative in approach, there's been a difference in the value when a loan is given versus when the gold is put to auction, according to Purwar.
"We are addressing this issue," he said. "The company has a strong and sound audit process involving internal and external audits, and as so entire portfolio gets audited comprehensively."
The RBI crackdown has had a significant impact on the business even though the company follows industry standards, the chairperson said. "We have been following industry practice and have almost 3,000 branches through which we disburse gold loans throughout the country."
"We have amended our policies to meet RBI's requirements," he said, adding that the company is in continuous dialogue with its banking partners to show to them that its business is sound.
While gold loans account for 30% of the company's total portfolio, these are largely short-term loans, Purwar said. "Most of our gold-loan clients are from lower-income households, and (it) is a business which we do very successfully."
Purwar is hopeful that IIFL Finance can restart its gold loan business earlier than nine months. "I personally believe that it is possible if we work hard to show to RBI our compliance."
Watch the full interview below
Edited Excerpts From The Interview:
In the last two days, the (IIFL Finance) stock has been down 20%-odd on the exchanges. Can you take us through the exact impact that we can see on IIFL Finance in this business with respect to gold financing?
AK Purwar: First of all, in IIFL, the gold loan portfolio is almost 30% of our total assets. It's quite a significant portfolio. Most importantly, this is a very short duration portfolio, ranging from six months to three years or four years. It gets repaid and recirculated and recycled very fast. Most of our customers are small farmers, small businessmen and coming mostly from the underprivileged sections of society. So it is a service, which we do very successfully.
Definitely, if the regulation comes, which stops the company from doing business to the extent of 30% of the business, which is a short-term, short-duration business, it definitely has a significant impact on the company as such.
Let us look a little more deeper. We have been following industry practice. We have almost 3,000 branches through which we disburse gold loans throughout the country. Having said that, now, the RBI has come with the directive. So far, we have been following strictly, the various industry practices, which were prevalent.
But now we have debated on these. For last couple of days, we had an intensive meeting of the board. And as a board and as a company, we have taken a view that we will strictly comply with RBI regulations in letter as well in spirit. And we have substantially looked up all the issues or concerns which have been flagged by the RBI.
We have amended our policies and our effort is that by 31st March, we are able to carry out all the required changes, amendments, remedial actions in the company. If there could be a few left, but we will definitely remedy those also. We are continuously going to engage with RBI to give them full satisfaction as to our business, and with regards to our compliance also.
Mr Purwar, you said you follow the regulations but you know, the RBI has been very categorical with respect to the kind of deviations that have happened. You know, like certifying purity and weightage of gold. You have breaches to the loan-to-value ratio, disposal and collection of loans. Auction process has not been followed properly and no transparency in terms of charges. These are serious charges which the RBI has put on IIFL Finance.
What we understand from the market is that there are instances where gold loans have been given and on top of that top-up loans have been given as unsecured loans. So, is there a forensic audit that you're doing for all your gold loan portfolio to see where the issues are?
AK Purwar: Let me clarify. We have this very strong, sound audit process in the company. We have a concurrent audit. Then we have an internal audit… As such, the entire gold loan portfolio gets audited very comprehensively.
Secondly, the issues which have been flagged by RBI. We grant loans strictly as per extant RBI guidelines... Valuations are done as per the industry practices. Having said that, there are a couple of issues in the sense that once we give the loan, we look at the purity of the gold. And then, we may give 75% of the valuation as a loan.
Now, when it comes to auction, then at the time of auction, we again get the gold, gold ornaments valued by our auditors, internal auditors. And these auditors have a somewhat conservative approach. Therefore, the valuations are a little less because of the conservatism. So there has been a difference in the value at which the loan has been given and there is a difference in the value of the gold ornaments when they are put to auction. Well, we are now compressively addressing this issue.
What is the total deviation in the entire loan book?
AK Purwar: Not much. You see, as far as the issue which you have flagged—of granting top-up loans, they are hardly 0.03%. So we have decided, at the board level to discontinue that, with immediate effect.
As far as the others are concerned, basically the devaitions have taken place because of the interest applications in the gold loan accounts.
What we are understanding is also that there are even some cases where you know, gold loans have been issued without any collateral gold in place?
AK Purwar: No. There's not a single case of that. I mean, I think that's not the correct way. We have of course given loans on top of loans which are not against gold ornaments, but clean gold, which hardly constitute 0.03% of the total loans, which we have decided to discontinue with immediate effect.
What are the internal processes and audit that is in place? You're part of the audit committee, you're a member of the audit committee there. What is the process that has been followed as far as loan is concerned?
AK Purwar: We have a strong internal audit team, which has a large number of officers who go and visit these branches and do audits. We also have a very well-established audit company as concurrent auditor who looks after this. And then we have a very strong statutory audit process. So as far as the audit side is concerned, we are very, very strict. As far as corporate governance in our company is concerned, we—all the board members—are very conscious of it and we are ruthless about it. We don't accept any deficiencies. So I don't think that is a concern for us.
Despite that ruthless audit, you know, RBI is able to bring in these deviations and impose a bar on gold loans.
AK Purwar: Let me submit here that we have been strictly following market practices. But we are, as a board and a company, as I already told you, we have taken a view that we will strictly abide by the RBI’s suggestions, regulations and guidelines, and have amended our policies and going to amend our policies. And that process, we propose to complete by 31st March. We are getting into a continuous dialogue with RBI, so as to completely satisfy them on this score and address this issue on a top priority basis. Our efforts are towards the earliest resolution of the issue which has just come to us.
Sir, you are a veteran banker. You're taking remedial measures, but you know very clearly that the company can take remedial measures immediately, but the RBI takes its own time to come back and clear you.
What is the timeline that you're seeing with respect to you know, coming back to normal business, because this is one-third of your book?
AK Purwar: Well, you rightly said. I have banking experience of around 40 years. You know, during the last 40-50 years, I have a very healthy amount of respect for the RBI—very, very strong respect for RBI. As a regulator, they are one of the best regulators in the world.
Having said that, now we are facing this situation. So, what we are trying is, that we are getting continuously engaged with RBI—trying to satisfy them, that whatever corrective measures we have taken, we will try to satisfy them and come back to business, as early as possible, but only after RBI permits us. But we are very clear in our mind that regulations have to be complied with, not only in letter, but in spirit as well.
The street believes that it will take at least nine months for you to come back to gold loan business again. Is that a good timeline?
AS Purwar: I would not like to make any comment here, but I personally believe that it should be possible if we work hard to show RBI, our compliance, past compliance record as well as today's compliance. And let us see how it works. But I think we should be able to complete this process earlier.
You are in the gold loan business. Have you been able to assess what has been the end use of those loans?
Both the regulators—SEBI and RBI—are worried about the fact that the money from short-term loans are getting ploughed into capital markets. So as a lender there, are you looking at those end-use proceeds?
RK Purwar: Actually, you know, let me get a little deeper into the question. Let us try to analyse who are our customers at the moment. Most of the customers are small farmers, labourers, the small, petty businessmen and so on and so forth. And what we do is that, they come to us for the loan, we give them the loan. Generally, it is for consumption purposes or whatever it is. As far as regulations are concerned, we simply focus on following strictly the process and giving them the loan.
You said that strict measures have been taken to ensure that you follow the RBI rules and regulations, not in just letter but also in spirit. So, what are the remedial measures that you're taking?
AK Purwar: Well, in the last couple of days, we had a series of board meetings. We have gone through the RBI report line by line. We have initiated these remedies, just a couple of months back. But because of this action, we have put a lot of urgency to this. We have internally laid down timelines for some of these to be implemented with immediate effect.
For example, the top-up loans which were being given so far to the gold loan borrowers, that practice has been discontinued, effective yesterday. So we are taking remedial measures. I am sure that we should be able to enter into a comprehensive dialogue with RBI… and convince them about our sincerity in implementing the regulation with them to do this.
You do co-lending along with banks there. How are the banks, who are partners, looking at this. We just heard the news about Fairfax giving nearly $200 million in liquidity support.
How are your banking partners supporting in this, because it seems that there is reluctance from banks to lend immediately and that's why Fairfax is stepping in?
AK Purwar: See, it is like this. Whenever a problem occurs in an institution and whenever the institution faces these kinds of issues, it has a collateral effect here and there, everywhere.
What we are doing is that we are equipping ourselves. If there is an eventuality, any problem, we should be able to comprehensively face it comfortably. That's about it all. As far as the banking system is concerned, we are in continuous dialogue with them and trying to show them that well, our business is sound, our business is on correct lines, our business is profitable, and that we follow sound corporate governance principles.
What is the total amount of credit length available to you at this point in time?
AS Purwar: I will have to check this out. I can check up this and get back to you.
You know, you had this relationship with at least 10-15 banks. Are most of the banks holding back their lending because of this RBI order?
AS Purwar: See, the RBI order has come only a couple of days ago. There are still a lot of lines in place with us.
Of course, as a banker, I would like to know if such an order comes, as a bank I would like to thoroughly know what the implications are for the business. That's a very natural response from the banking system. As a banker, I could like to also respond in the same manner. Let’s see how it works out, but I think overall business is on sound lines. And if temporarily, the gold loan portfolio starts getting liquidated, we would be repaying the loans, which we have taken from those institutions against this gold ornaments.
What is the average tenure of your gold loans?
AS Purwar: I'll have to check up. It won't be very long. It should not be very long. The average duration of the loan should not exceed one-and-a-half to two years.
Sir, as a company there's a hit on the biggest block of your business which is gold loans—one-third of your business comes from there. And that business accounts for nearly 8-9% of yields or margins for you.
It's going to be a big impact that's coming into your books not only for FY24 but FY25 too. Right?
AS Purwar: Well, I agree that in the next six months to nine months time, lot of our gold loan book will get liquidated.
But having said that, we are making efforts to ensure to convince RBI about our stance, about our compliance and about our corrective measures which we have taken and corrections, which we have already done.
Having said that, there is an advantage with our organisation—that in terms of IT, our organisation can compete very, very effectively in the market. We have very good sound IT systems in place. So once the RBI lifts and permits us to start the business, I think it won't take much time for our organisation to come back to business in a very fast manner and regain whatever market share we are losing today. I don't expect that any loss of market share will be there in 2025 or 2026. Our IT systems are so robust that we have an advantage vis-a-vis our competitors.
So you're saying that you will come back to the gold loan business, permitting RBI as and when they're satisfied?
AS Purwar: Yes, our efforts have started immediately. And we are trying to convince RBI, about the sincerity and genuineness of our side and our compliance to the regulations. As soon as they are convinced, I'm sure they will permit us and we shall go back to business as normal, as usual.
You have seen regulatory action also coming in the form of, you know, lending against shares and debentures. Do you have an exposure to that book as well?
AS Purwar: Very limited, not much.
Have you reassessed whether the lending norms have been followed there, because now every NBFC which is lending to shares is relooking at on the back of the order that came for JM Financial?
AS Purwar: You know, I am also a banker by profession and I have put in my beautiful 40 years in the organisation.
I am aware of the implications of non-compliance. And as an organisation, as an individual, as you have said as a veteran banker, my job is to ensure that the organisation wherever I work—and this organisation is very dear to me—works in a fully compliant manner, as far as RBI regulations are concerned.
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