New Delhi: The Reserve Bank of India (RBI) has imposed a ban on the issuance of new gold loans by IIFL Finance, a non-banking finance company (NBFC), due to some supervisory concerns in the company’s gold loan portfolio. The ban will remain in force until further notice from the central bank.
RBI’s statement
RBI said in a statement that it has taken this action under Section 45L (1)(B) of the Reserve Bank of India Act 1934, which empowers the central bank to issue directions to any NBFC in the interest of public or depositors or the NBFC itself.
The statement also said that IIFL Finance can continue its existing gold loan business and service the existing customers as per the terms and conditions of the loan agreement.
Irregularities in LTV ratio
The central bank said that it had inspected IIFL Finance concerning its financial position as of March 31, 2023. The inspection revealed irregularities in the loan-to-value (LTV) ratio of the company’s gold loans.
The LTV ratio is the percentage of the loan amount that is secured by the value of the gold pledged by the borrower. RBI has prescribed a maximum LTV ratio of 75% for gold loans by NBFCs.
RBI said that the irregularities in the LTV ratio of IIFL Finance were not only regulatory violations but also detrimental to the interests of the customers, as they exposed them to higher risks of default and loss of collateral.
The central bank said that it has directed IIFL Finance to conduct a special audit of its gold loan operations and submit a report within three months. Based on the findings of the audit and the corrective measures taken by the company, RBI will review the ban and decide on the future course of action.
RBI’s action against Paytm Payments Bank
This is not the first time that RBI has taken major action against a financial entity in recent times. On January 29, RBI issued an order to Paytm Payments Bank, barring it from opening new accounts and initiating new credit transactions after February 29, 2024.
RBI had cited deficiencies in the governance and compliance functions of Paytm Payments Bank as the reasons for the order. However, RBI later extended the deadline for compliance to March 15, 2024, after Paytm Payments Bank submitted a plan of action to address the issues.
