Fitch places IIFL Finance on ‘Rating Watch Negative’ amid RBI crackdown

Fitch Ratings has placed India-based IIFL Finance Limited’s ‘B+’ Long-Term Issuer Default Rating (IDR) and medium-term note (MTN) programme rating on Rating Watch Negative (RWN).

Fitch Ratings has placed India-based IIFL Finance Limited’s ‘B+’ Long-Term Issuer Default Rating (IDR) and medium-term note (MTN) programme rating on Rating Watch Negative (RWN).

The RWN follows a 4 March 2024 regulatory directive by the Reserve Bank of India (RBI) for IIFL Finance to cease new gold-backed lending and related off-balance-sheet funding transactions. The impact of the restrictions will depend on their duration and any spill-over effects on the rest of IIFL Finance’s business.

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Fitch will use the Watch period, which is typically up to six months, to gather information on the remediation process and the company’s broader performance following this event. The RWN indicates that the rating could remain unchanged or be downgraded upon the resolution of the Watch.

The RWN reflects downside risk to IIFL Finance’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 (3QFY24).

The restrictions apply to new lending and off-balance-sheet funding activities on gold loans. As such, the company will continue to earn income on its outstanding gold-loan portfolio until the balances mature. The financial implications of the curbs will depend on the length of the restrictions, balanced against the company’s ability to maintain other lending activities, which have not been cited in the ruling.