IIFL Finance faces liquidity crunch amid gold loan business curbs: Report

IIFL Finance is grappling with a liquidity crunch as banks have adopted a cautious approach in lending to the non-bank lender following regulatory constraints on its gold loan business, according to sources familiar with the matter,.

An unnamed senior official at the company revealed that banks have refrained from sanctioning new credit lines or disbursing from existing limits, citing the curbs imposed on IIFL Finance's gold and other businesses. The impact of these restrictions on the overall business is estimated to be around Rs 500 crore.

The Reserve Bank of India (RBI) directed IIFL Finance in early March to halt the sanctioning, disbursing, and selling of gold loans, citing "material supervisory concerns" within its gold loan portfolio. Subsequently, the company cancelled a planned $400 million bond fundraising initiative.

To alleviate liquidity concerns, its major shareholder, Fairfax India, pledged to provide up to $200 million in liquidity support. Additionally, the company has raised Rs 500 crore through bonds and aims to raise Rs 1,272 crore through a rights issue of shares.

Banks, however, are currently adopting a cautious stance and are awaiting regulatory clarity before extending further exposure. While co-lending arrangements are expected to resume once the RBI's ban is lifted, banks are exercising caution in providing term loans at present.

As of December 31, 57 per cent of IIFL Finance's total borrowing was sourced from banks. Despite having unencumbered cash and liquid balances of around Rs 4,035 crore as of March 5, the drawdown in liquidity has accelerated, necessitating a closer examination of the company's other business operations.

With regulatory scrutiny intensifying, banks are hesitant to extend lending to entities under the regulator's watch. Consequently, they prefer to withhold lending until clarity emerges on how compliance-related issues will be addressed and the resumption of business activities planned.

(With Reuters inputs)