India's IIFL Finance is encountering a liquidity squeeze as banks exercise caution in lending to the non-bank lender after regulatory constraints on its gold loan business, according to a senior official and two bankers familiar with the matter.
An official at the company, speaking on condition of anonymity, revealed, "Banks are neither sanctioning new lines (of credit) nor disbursing from already sanctioned limits."
The impact of the curbs on IIFL Finance's overall business is estimated to be approximately 5 billion rupees ($60 million), the official stated, noting that banks have halted lending to the company's gold and other ventures. Following the Reserve Bank of India's (RBI) directive in early March to halt gold loan activities due to "material supervisory concerns," IIFL Finance scrapped a planned $400 million bond issuance. Its principal investor, Fairfax India, pledged up to $200 million in liquidity support.
Although the company has since raised 5 billion rupees through bonds and aims to secure 12.72 billion rupees via a rights issue of shares, banks remain cautious.
"Banks are currently in a wait-and-watch mode, and are waiting for the regulatory dust to settle before taking on more exposure," noted an official from a state-run bank.
Co-lending activities, which spread credit risk, are expected to resume once the RBI ban is lifted, but banks are refraining from term loans for now. As of December 31, 57% of IIFL Finance's total borrowing stemmed from banks. However, the drawdown in liquidity has accelerated, posing challenges for the company's other operations.
Another banker emphasized the need to avoid extending credit to entities under regulatory scrutiny, stating, "With the regulatory scrutiny on banks increasing, we would prefer to temporarily halt lending till we get clarity on how they sort out compliance-related issues and plan to restart the business."
Both bankers spoke on condition of anonymity due to the sensitivity of the matter. IIFL Finance reported unencumbered cash and liquid balance of around 40.35 billion rupees as of March 5, according to rating agency ICRA. However, the tightening liquidity situation is pressing, necessitating clarity on regulatory compliance for banks to resume lending.
