IIFL Finance Undergoes Special Audit Amid Concerns Over Loan Practices

IIFL Finance, a leading non-banking financial company (NBFC) in India, is currently undergoing a special audit initiated by the Reserve Bank of India (RBI) due to concerns over the company's loan disbursement practices. The RBI's move comes as part of its supervisory action to scrutinize IIFL Finance's lending processes, particularly in the gold loan business.

The central bank had earlier, on March 4, 2024, imposed an embargo on IIFL Finance's disbursement of new gold loans until the completion of the special audit. This measure was taken in response to the RBI's inspection, which revealed material supervisory concerns in the company's gold loan portfolio, including non-adherence to the standard auction process and lack of transparency in charges being levied to customer accounts.

According to IIFL Finance's announcement to the stock exchanges on April 23, 2024, the special audit directed by the RBI has now commenced. The company has pledged to extend full cooperation to the audit team and keep all relevant stakeholders informed about material developments concerning the progress of the audit.

Why this matters: The RBI's decision to initiate a special audit of IIFL Finance highlights the growing concerns about the NBFC sector's lending practices and the potential risks they pose to the financial system. The outcome of the audit and any subsequent actions by the RBI will have significant implications for IIFL Finance's operations and financial standing, and will be closely watched by the industry and investors.

The special audit aims to thoroughly examine IIFL Finance's operations, financial records, compliance with regulatory requirements, and risk management practices to identify any irregularities and ensure that the company adheres to regulatory standards. The RBI's recent inspection also found discrepancies in assessing and certifying the purity and weight of gold during loan approval and in auctioning off defaulted items.

In a statement, IIFL Finance said, "We will cooperate fully with the RBI and the special auditor during the audit process. We are committed to maintaining the highest standards of compliance and transparency in our operations." The company had recently approved a rights issue of Rs 1,272 crore to raise capital after the RBI's curb on its gold loan business.

The special audit of IIFL Finance is part of the RBI's ongoing efforts to strengthen the supervision and regulation of the NBFC sector, which has been facing challenges in recent years due to rising non-performing assets and liquidity concerns. The central bank has been taking proactive measures to ensure the stability and soundness of the financial system, including conducting regular inspections and audits of NBFCs.

Key Takeaways

• RBI initiated special audit of IIFL Finance over concerns in gold loan business
• RBI found issues in IIFL's loan approval, gold valuation, and auction processes
• RBI imposed embargo on IIFL's new gold loan disbursements until audit completion
• IIFL pledged full cooperation and committed to highest compliance standards
• Audit part of RBI's efforts to strengthen NBFC supervision amid rising NPAs