2 key risks for IIFL Finance as RBI ban likely to hit profitability

Motilal Oswal Securities in its latest note on IIFL Finance Ltd maintained its 'Buy' on the stock with a target of Rs 560, but said it is difficult to predict how long it would take to get the RBI ban reviewed and revoked. In light of some recent episodes where the RBI banned certain activities/products of financial institutions, its base case assumes that it could take around six months to get the RBI to conduct a special audit and subsequently rectify the observations to the satisfaction of the RBI.

"After incorporating the impact of this ban on IIFL’s gold loan growth in our estimates, we cut our FY24/FY25/FY26 EPS estimates by 2 per cent/14 per cent/15 per cent," it said.

Among the key risks for IIFL Finance, Motilal Oswal said a sharper run-down in the gold loan portfolio and employee attrition are likely if the ban remains in force for longer. Besides, it sees reputational damage that might necessitate renewed investments in building trust in its brand.

"Beyond the immediate impact on incremental gold loans, IIFL Finance will also have to work with its existing customers and co-lending partners to prevent any damage to its gold loan brand and trust that it has built over last many years. It will also have to make efforts to retain existing customers and employees," Motilal Oswal said.

The actual financial impact, it said, would depend on the duration for which this ban remains in force. Motilal Oswal said it will continue to closely monitor the developments over the next few quarters. While there could be near-term price volatility in the stock, it maintained its BUY rating and target price of Rs 560 on the stock.