In Q1FY25, IIFL Finance Ltd. paid Rs 575 crore to an Asset Reconstruction Company (ARC) for the purpose of managing stressed commercial real estate debts across six accounts.
One non-performing asset (NPA) valued at Rs 52.4 crore and five special mention accounts (SMA) valued at Rs 390.98 crore comprise the principal amount of outstanding loans. Following the transfer of loans in the first quarter ended June 2024 (Q1FY25), the company reversed excess provisions of Rs 36.42 crore to a profit and loss account, per a filing with the stock exchange (BSE). It did not, however, identify the ARC to whom it sold the loan pool.
The company moved some of the CRE cases to ARCs, according to Nirmal Jain, managing director of IIFL Finance, during the post-result analyst call. From an extended perspective, it appears that this would be a more effective approach to handling these risks, mainly because the 90-day income recognition standard makes it challenging to secure additional funding for the real estate project.
The project enters the non-performing category even after a day of default (beyond 90 days). Then, continuing the projects and making further loans becomes extremely challenging. He stated that the ARC structure is a superior way to handle these exposures because, unlike banks, we are unable to employ the Debt Service Reserve Account (DSRA).
An analyst presentation stated that IIFL Finance’s commercial real estate portfolio fell from Rs 1,933 crore in June 2023 to Rs 1,047 crore in March 2024 and then to Rs 649 crore in June 2024.
With regard to its gold lending business, Jain stated that the company considered the offer to become a Business Correspondent (BC) in order to find loan sources for other lenders. But it was found that banks had a more drawn-out procedure for designating BCs, beginning with a request for proposals (RFP), submitting a proposal, and then evaluating it.
Since the beginning, we have been in communication with the Reserve Bank of India, and we anticipate that we will soon begin lending and co-lending (gold loans). Under such circumstances, the BC position can unnecessarily divert resources and procedures. Banks will want a specific volume commitment once you begin BC activity. That might not be as feasible for our cost structure from a business standpoint. He said, “You get a fee under the BC structure, and banks will likely keep all of the margin and interest income.”
The financing business was instructed by the RBI to cease the issuance of new gold loans, as well as the assignment, securitisation, and sale of current gold loans, by March 4, 2024. This came after supervisory worries about loan amounts disbursed and collected in cash that exceeded legal limits and about noncompliance with the auction procedure as routine. On June 30, 2024, its gold loan book fell by 33% year over year (Y-o-Y) to Rs 14,727 crore.