Fitch Places IIFL Finance On Rating Watch Negative

Action reflects downside risk to IIFL’s franchise, profitability and overall risk profile if RBI’s curbs on new gold-backed lending are prolonged
Fitch Places IIFL Finance On Rating Watch Negative

Fitch Ratings placed IIFL Finance Ltd.’s B+ long-term issuer default rating and medium-term note program rating on Rating Watch Negative (RWN) after the central bank’s recent action against the company.

The Reserve Bank of India (RBI) on 4 March directed IIFL to cease new gold-backed lending and related off-balance-sheet funding transactions, Fitch said in a statement.

The RBI had ordered IIFL to stop sanctioning or disbursing gold loans or assigning/securitizing/selling any of its gold loans over certain material supervisory concerns in the company’s gold loan portfolio.

Fitch said the RWN reflects downside risk to IIFL’s franchise, profitability and overall risk profile if regulatory restrictions on new gold-backed lending are prolonged. Gold loans are a key product for the company, accounting for 32% of assets under management and 18% of gross on-book loans in the third quarter of the financial year ending March 2024, it noted.

The rating agency said it will use the watch period, which is typically up to six months, to gather information on the remediation process and IIFL’s broader performance and take a call on the company’s ratings accordingly.

Fitch said the impact of the RBI restrictions will depend on their duration and any spill-over effects on the rest of IIFL’s business.

The recent developments, however, raise IIFL’s exposure to regulatory compliance and reputational risk, Fitch said, adding that franchise risk could extend beyond the gold-loan portfolio if the repercussions spill over into the company's other product lines.

The rating agency noted the RBI's restrictions do not directly weaken IIFL’s liquidity inflows, as loan collections are allowed to continue and this should underpin adequate liquidity to meet scheduled debt repayments.

IIFL’s board earlier this week approved raising as much as 2,000 crore rupees ($242 million) through issue of equity shares and debentures.

In addition to the fundraising approvals, the board also gave its nod for several appointments, including appointing Bijou Kurien and Nihar Niranjan Jambusaria as additional (independent) director of the company.

Note: $1 = 82.8466 Indian rupees

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