IIFL Finance transfers stressed realty assets to ARC for Rs 575 crore

No plans to become BC for gold loan business

IIFL Finance Ltd has transferred stressed commercial real estate loans in six accounts to Asset Reconstruction Company (ARC) in Q1FY25 for a consideration of Rs 575 crore to effectively manage such exposures.

The principal outstanding of loans – one non-performing asset (NPA) was Rs 52.4 crore and five Special Mention Accounts (SMA) was Rs 390.98 crore. It reversed excess provision worth Rs 36.42 crore to a profit and loss account following the transfer of loans in the first quarter ended June 2024, according to a filing with the stock exchange (BSE). It, however, did not specify the name of ARC to which it sold the loan pool.

Nirmal Jain, managing director, IIFL Finance, in the post-result analyst call, said the company transferred some of the commercial real estate (CRE) cases to ARCs. The experience from the long-term point of view is that it may be a better way to manage these exposures, primarily because the 90-day income recognition norm makes it difficult for further funding to the real estate project.

Even with a day of default (beyond 90-days) the project goes into non-performing category. Then it is very difficult to do incremental loans and sustain the projects. “Unlike banks, we can’t use Debt Service Account (DSRA) and therefore, these exposures are better managed through ARC structure,” he said.

IIFL Finance’s commercial real estate portfolio declined from Rs 1,933 crore in June 2023, to Rs 1,047 crore in March 2024 and further to Rs 649 crore in June 2024, according to an analyst presentation.

Referring to its gold loan business, Jain said the company evaluated the proposal to become Business Correspondent (BC) to source loans for other lenders. But, it was discovered that banks have a longer process to appoint BCs which starts with Request for Proposal (RFP) and submit a proposal and then there is evaluation.

“We have all along been engaging with the Reserve Bank of India and believe that in the short term, we will restart lending and co-lending (gold loans). Then it (BC role) may be an unwarranted distraction to resources and processes. Once you start BC activity, banks will expect a certain commitment in volume. Commercial point of view that may not be as viable for cost structure. In the BC structure, you get a fee and banks will probably keep the entire interest income and margin,” he added.

On March 4, RBI had directed the finance company to stop sanctioning or disbursing new gold loans and the assignment, securitisation, or sale of existing gold loans. This followed supervisory concerns in disbursals and collections of loan amounts in cash exceeding statutory limits and non-compliance with the standard auction process. Its gold loan book declined by 33 per cent Y-o-Y to Rs 14,727 crore as of June 30, 2024.