IIFL Finance Faces Downgrade Risk On Gold Loan Ban

(Bloomberg) -- Indian shadow lender IIFL Finance Ltd. is facing a threat of credit rating downgrade as early as this week, as a months-long regulatory ban on its gold loan business remains unresolved, according to people familiar with the matter.

A local rating agency has informed the company about a possible rating change from AA to AA-, said the people, who asked not to be identified as the information is private.

A potential downgrade may pressure the firm’s borrowing channels as funding costs could grow, and lenders could ask for early repayment from the beleaguered non-banking finance company which is already navigating a business contraction.

IIFL Finance shares extended a decline to as much as 5.8%, the most in over a month, after Bloomberg News reported on the possible rating downgrade. Overall Indian stocks were higher.

IIFL fell under regulatory scrutiny in March amid a crackdown on financial firms, when it was asked by the central bank to stop disbursing new gold-backed lending following “material supervisory concerns”. Three local rating companies - ICRA Ltd, Crisil Ltd and Care Ratings Ltd - put it under rating watch with negative or developing implications following the ban. International credit assessor Fitch Ratings also put its B+ rating on negative watch.

The company may let go of more than 9,000 employees in the gold loan business if the ban continues, said one of the people. Its employee number in gold loan branches already dropped from 15,000 in March to 12,000 in June, according to its financial reports. The assets under management in its gold loan business more than halved to 121.62 billion rupees ($1.5 billion) as of August 5 since the March ban.

A spokesperson of IIFL Finance declined to comment.

--With assistance from Alex Gabriel Simon and Anirban Nag.

(Updates with stock move in fourth paragraph.)