By Dilip Cherian
There’s a kind of hush in the gold loans market. The Reserve Bank of India’s (RBI's) crackdown on the second-largest company, which has been dispersing gold loans with complete confidence and massive distribution, has suddenly stopped it in its tracks. Inexplicably, this sudden clamping down on IIFL Finance is not only unexpected but also looks abrupt and disproportionate. The heart of the controversy lies not in the RBI's right to enforce its laws but in the selectivity and severity of its enforcement and the massive air of anxiety it has triggered in the entire ecosystem within which these loans operate. Like a typhoon, it has chosen to be selective in the immense damage that regulatory overreach has struck at.
The apparent allegations, on the basis of which these typhoon style disruptions have been triggered are actually quite routine in this highly regulated, but operationally flexible marketplace. To start with, take the issue of cash disbursement amounts (not legally allowed above Rs 20,000). Majorly the whistle has been blown because the company has significant cash transactions far exceeding the statutory limit. While the RBI’s unforgiving action spotlights the regulatory body's resolve to enforce strict financial discipline, the heart of the controversy lies not in the RBI's right to enforce but in the selectivity and severity of its enforcement on just one large player.
There is sufficient anecdotal evidence and a whole host of evidentiary elements that reveal quite clearly that most companies involved in this business, even today and most routinely in the past, flout this rule. Therefore, the uncertainty is even higher because nobody knows when the RBI may act again and clamp up the entire flow of funds in this vital sector.
Throwing the rulebook at just one company is ascribed most bizarrely to the RBI’s focus on the breach of the Rs 20,000 cash transaction limit for loan disbursement. Perhaps it's because it makes little sense for customers in remote underbanked areas, where even telecom and electricity for digital transactions are often unreliable. They need the confidence and the comfort of slightly larger transactions than are technically permissible under this rather stifling and impractical rule. Only companies who have the experience and the bandwidth to understand this market can actually serve this population and ensure that it gets the succour that it needs.
The other lapses have centred around non-compliance with technicalities such as the gold auction process (such as taluka-level auctions, gold purity change at the time of the auction, and disclosure of auction charges levied) and similar aspects. Even though this may well be justified, as the RBI circular is clear in this regard, the company in question has clarified that gold auctioned last year represented only 1.3 per cent of the total loan value disbursed. So, it's really not worth raising an enormous alarm about the system for this tiny proportion of auctions that don’t pose any systemic risk.
Most of us don’t pay too much attention to all of this, because this specific variety of loans, the ubiquitous gold loans, actually address certain segments of the market that continue to remain unbanked. These are the desperate people who often unpredictably have urgent needs for relatively small sums of money.
The common factor that they share is that they are confident of being able to repay the loan quite easily. It’s a market that financial institutions don’t know enough about and certainly don’t care enough about. But it’s a critical market if we want to keep alive the belief that there are still official ways and means by which smart and committed entrepreneurs can make their fortunes even at the bottom of the pyramid everyone talks about. And this is without addressing the question of urgent family crises that crop up from time to time amongst those in the most vulnerable sections of our population.
Listen to the tales from the ground: "A man walks into our branch with his wife or mother’s jewelry only when he has no other alternative for finance,” explained a branch manager of a leading gold loan company recently. In rural India, small towns, and remote areas, gold loans offer a financial lifeline to small-scale borrowers for whom access to traditional banking is challenging when investing in small businesses or addressing emergency financial requirements. Typically facilitated by Non-Banking Financial Companies (NBFCs), these loans cater to a diverse clientele, often extending small amounts, around Rs 20,000- Rs 30,000, which are particularly beneficial for individuals with marginal means.
The need is great, and the stakes are certainly high. This market represents one of the key economic drivers that the Indian growth story, and our attempt to be a $5 trillion economy, will eventually be based on. After all, it’s all about assets and the ability to invest in a way that works for those making this economy great. Indian households' stock of gold jewelry is estimated at a staggering 30,000 tonnes (over Rs 200 trillion) and continues to rise annually by approximately 1000 tonnes (Rs 7 lakh crores). This abundance of gold presents not just a cultural fascination but also a practical resource for families nationwide. Randomly clamping down on a company that is showing the direction for many others to follow does not make sense and certainly defies any logic at this point in time.
The RBI's hardened stance on gold loans today risks exacerbating the financial exclusion of these communities and inadvertently pushing marginalised borrowers back into the clutches of unregulated moneylenders. The latter are known for their usurious interest rates and exploitative practices, in contrast to the regulated, yet accessible services offered by gold loan NBFCs. Sanket Chedda, an analyst at DAM Capital, estimates that the IIFL ban, even if continued for two months, could result in delayed inclusion, if not exclusion, of half a million households in the formal credit network.
IIFL Finance - The Company Under Scrutiny
The current panic in the vast gold loans marketplace is on account of the fact that the RBI’s crackdown, on IIFL has been both unexpected and extraordinarily severe. The reason for the central bank’s announcement that it will allow the company to resume actions once it’s audit is complete and the delay between action and resumption, is something that hasn’t received enough attention as yet.
It is not widely known that IIFL Finance is India’s second largest gold loan NBFC. Staggering is the size of these well-regulated operations, with current loan assets under management of Rs 24,692 crore as of December. Impressive and significant also, is the fact that the company is already, catering to an unbanked and underbanked customer base of 56 lakh households, which translates into more than 56 million citizens who are directly or indirectly affected by the loan processes that IIFL masterminds.
IIFL Finance is present across small towns and rural areas in 25 states and Union territories through 2,721 dedicated branches (in 1,492 locations) and 15,000 own employees, creating large-scale employment in small locations. Over 80 per cent of the IIFL Group’s branches are in non-metro locations. This is why the immediate impact of the curtailing of IIFL’s operations may not be getting the attention that it deserves. But given the damaging economic consequences – which are possibly less apparent because they involve and impact a population that does not attract adequate media attention – are bound to surface in the next few weeks.
IIFL connects at least two to three million new-to-credit customers to the formal lending system in a year, making it one of the largest last-mile lenders. Given that this is what is driving both consumption as well as rural entrepreneurship, there’s no doubt that the second order consequences are going to be substantial unless the RBI completes its audit quickly and gets this company back on its feet before any further damage is done.
IIFL Finance has been a pioneer in digital transformation, risk management and audits that are an essential part of the company’s capability, demonstrated over the years, to manage such a large gold loan portfolio. As per data, the available gold auctioned last year represented only 1.3 per cent of the total loan value disbursed. Industry experts recognise that this has two aspects. One, the company is able to identify customers who are capable of returning the loans that they take and two, that the company has the requisite structures to follow up and ensure that defaults are minimised and unlikely.
IIFL mentioned in its analyst call recently that the total number of gold loan-related customer complaints to the RBI was 135 in the entire year of 2023-24. That's tiny given that it has about six million customers. There would be very few industries in the financial services segment who can claim this level of consumer satisfaction and demonstrable consumer enthusiasm on a sustained basis over the last 14 years of service in the gold loans segment.
Dilip Cherian is the co -founder of and Consulting Partner for Perfect Relations. He is a communications consultant, a political campaign advisor and a political & policy professional
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