RBI on IIFL Finance, JM Financial: Actions to ensure ethical business practice, analysts say

The Reserve Bank of India (RBI) seems to be in on a system clean-up mission after its recent orders on companies like IIFL Finance, JM Financial and even Paytm Payments Bank.

The central bank on March 4 had imposed an embargo on IIFL Finance’s gold loan business and then on JM Financial Products’ loan against shares & IPO financing business the next day, citing persistent regulatory non-compliance and governance issues.

Earlier on January 31, RBI had barred Paytm Payments Bank from accepting fresh deposits and doing credit transactions after February 29 citing repeated violations of norms and non-compliance with multiple rules. This deadline was later extended to March 15.

Analysts had earlier flagged that the Paytm Paytment Bank saga would have ramifications for the overall sector. They said that the list of financial penalties, and even of business embargos, was likely to scale up and should thus keep regulated entities and fintech companies on edge.

Also Read: JM Financial share price crashes 19% after RBI bans lending against shares, debentures

While RBI’s actions indicate that it has zero tolerance for persistent regulatory non-compliance or misgovernance, its unrelenting clean-up drive is expected to impact growth, but also foster an environment for ethical lending and business practice.

“We believe these punitive actions will impact systemic growth for NBFCs in the near term, but will hopefully curb unethical business practices, avert systemic collapse as seen in the past, and enhance stakeholder confidence in the long run,” said analysts at Emkay Global Financial Services.

Deepak Shenoy, CEO of Capitalmind, in an interview with a news channel, also said RBI’s crackdown will now hit the whole industry and not just JM Financial.

The central bank had put an embargo on fresh sanctions, disbursements and securitization of gold loans by IIFL Finance on March 4, citing multiple supervisory concerns, including deviation in assaying and certifying purity of gold during sanction of loan and at the time of auctions, no adherence to the standard auction process, breaches in LTV ratio, unfair charges, and cash collections higher than the prescribed limit.

IIFL management conveyed that majority of the concerns were operational in nature, and not an outcome of any unethical practices by the company. As per management, Gold Loan asset under management (AUM) stands at ₹24,700 crore as of December 2023 and forms a sizable around 31% of IIFL's overall AUM.

Also Read: IIFL Finance share price down 20%; Jefferies downgrades the stock ratings to Hold as gold loan ban may hurt profit

In the case of JM Financial Products, the RBI has restricted the company, to cease and desist with immediate effect, from doing any form of financing against shares and debentures, including sanction and disbursal of loans against Initial Public Offering (IPO) of shares as well as against subscription to debentures. 

Such restrictions have been put in mainly due to multiple deficiencies observed in the company’s IPO and NCD subscription financing business.

Given the different customer profiles of NBFCs, analysts at Emkay Global believe that the benefit, if any, for banks will be limited from the IIFL fall-out. 

“While many banks would potentially review their sourcing deals/partnerships across loan products to dodge the regulatory glare; this should thus impact growth to some extent,” said the Emkay analysts.

Also Read: IIFL Finance says Watsa's Fairfax to invest up to $200 mn in liquidity support

After RBI’s punitive action on Paytm Payments Bank, the analysts had said that the actions will have some impact on run-away organic or sourced growth in unsecured loans, force regulated entities (RE) to re-look their partnerships with fintechs, increase the systemic regulatory compliance cost, and possibly de-rate the fintech space.

They believe there will be some winners, like Zaggle (techfin) tapping into the employee benefit business of Paytm, potentially partnering banks with Paytm, for instance, Axis Bank, and so on.

On the other hand, there could be a transient impact on the unsecured PL growth of NBFCs, such as Aditya Birla Capital, Poonawalla Fincorp, L&T Finance Holdings, and Piramal Enterprises. 

Its preferred picks among traditional banks and NBFCs are ICICI Bank, SBI, Karur Vysya Bank, Shriram Finance, and M&M Financial Services. 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.