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RBI revokes gold loan ban; IIFL likely to take steps to regain market share

The RBI has lifted the ban on IIFL’s gold loan business, effective immediately. The RBI embargo on the company’s gold loan operations was in force for more than six months, similar to previous such instances of embargo in the industry. IIFL can now resume the sanctioning, disbursal, assignment, securitization and sale of gold loans.

* IIFL’s gold loan AUM stood at ~INR260b as of 4th Mar’24, when the ban came into effect. It subsequently declined to ~INR147b as of Jun’24 and ~INR122b as of 5th Aug’24. Assuming that ~10% of the outstanding gold loans run down every month, we expect IIFL’s gold loan AUM at ~INR105b as of 19th Sep’24, when the ban was revoked.

* We expect IIFL to now make a strong comeback in the gold lending business to regain its market share in the segment. We believe that IIFL could even take pricing actions and compete aggressively (if needed) to accelerate its gold loan growth. While this could have some impact on the segment’s profitability in the near term, it will help IIFL regain its market share from its peers (like MUTH, MGFL) and even some banks.

* While the profitability in the gold loan segment (particular for NBFCs) could be under pressure in the near term, we clearly do not expect a repeat of the episode when there was cut-throat competition and gold loans were offered in India at lowest rates of 0.5%-0.8% per month (between Oct’21 and Mar’22). However, the advantage for MUTH/MGFL due to the gold loan ban on IIFL will now end. Higher gold prices will still remain a tailwind for the entire sector.

* Following the RBI ban, a few media articles recently suggested that IIFL could face a credit rating downgrade in the event of a delay by the RBI in lifting restrictions. We believe that those concerns are now unfounded and that credit rating agencies, which had placed the company on Rating Watch (RW), could, at some stage, look to upgrade their credit rating outlook on IIFL.

* During the gold loan ban period, IIFL did not close down any of its gold loan branches and did not terminate any of its employees. Instead, the company was slow in hiring and did not replace employees if there was any natural attrition at the relationship manager or feet-on-street level. The gold loan business continues to be led by Mr. Saurabh Kumar, who has been with the company for close to a decade.

* IIFL has ensured that there is full compliance and all remedial actions have been taken, including all the directions in the master guidelines. It has also hired a few people at the CXO level and is in the process of hiring a few more, so that the risk, audit and compliance (entire risk assurance) functions are further strengthened.

Valuation & View

* IIFL’s management had shared in its last earnings call that the company was in compliance with all the RBI observations, which led to the ban on gold loans. It is now better placed for the next phase of high-quality growth.

* We have not made any changes in our estimates. We look forward to engaging with the company management to understand its strategy and approach going ahead and to understand its outlook on AUM growth. The stock trades at 1.5x FY26E P/BV and ~10x P/E. IIFL could see a valuation re-rating as investors get renewed confidence in its ability to claw back its market share in gold loans. We maintain our BUY rating on the company with a revised TP of INR600 (based on Mar’26E SOTP of the standalone business and the two subsidiaries).

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