IIFL Finance : Landmine Detected

And whether you should catch this falling knife or not...

IIFL Finance was locked in lower Circuit today. Down only 20%!

If you’re thinking of exiting, think again because….Ain’t nobody buying your Goods.

It’s also a not so Gentle reminder that “Stop Loss” is NOT an anti-dote for Fuzzy thinking.

Now that I’m done sounding preachy, Let’s analyse what’s up with IIFL Finance and Whether you should try to catch this falling knife?

Let’s go!

Yesterday Evening at around 5:20 pm, IIFL Finance received an email from RBI. It was a shocker for IIFL Finance or so its Chairman Says.

Regardless of whether “you should’ve seen it coming” or not, RBI’s actions of late are nothing short of exemplary.

Regulatory action of this nature has been rare in the past. I can recall almost no other instances where the RBI has barred an entity from disbursing certain types of loans.

For RBI to do what it did, the violations MUST be serious AND THEY ARE. We will look into it in just a second but before that….the context!

RBI’s action comes amid a credit environment that is booming and some say we are today where we were somewhere around 2004-2005. Loans growth is coming from almost every section of the economy (except maybe Large Industries) and newer players and newer business models are emerging.

Because RBI knows that the “Worst of mistakes are made in the best of times”, the action on IIFL Finance (& PayTM and JM Financial (just in) and BNPL players and Higher Risk weights for Retail Loans & Fintechs) are all a slew of measures aimed at ensuring, the system doesn’t get ahead of itself.

The consequences of weak Regulation is the Past were 10 long years (‘Lost Decade’) (2011-2021) of sub-par economic growth when NPAs were swept under the rug for far too long. RBI has learnt from its mistakes it appears.

Seen in that context, the RBI is telling the Lending Industry: “Stop F**king around”

As for IIFL Finance, its violations are hardcore to say the least, despite the chairmans’ assertions that this is an “operational issue” not a “Governance issue”.

Bear in mind, that ~30% of IIFL’s Loan book is Gold loans and since a significant portion of Gold loans are small ticket loans and a significant portion of the collections are in cash, it creates opportunities for shady behaviour.

So, that’s what’s up.

But you know what happens when a stock that has done well lately crashes hard? New Investors are tempted to “catch the falling knife”.

Please try NOT to do that.

Banks & NBFCs are run on trust and IIFL Group as a WHOLE, not JUST IIFL FINANCE has had a long string of incidents that have cast doubt on their TRUST factor

In just the last 1 year, several material issues related to the IIFL group have been reported. For Example :

Date : June 2023

and a more recent RBI crackdown on AIFs highlighted IIFL Finance’s exposure to some of the same companies it had loaned money to.

Date: December 21st 2023

This means that IIFL Finance was making Equity investments indirectly in companies that were unable to pay their debt. Despite the amount being relatively small, this is as shady as it gets to be honest.

Thirdly, add to the above incidents the fact that: Prem Watsa, one of the most respected value Investors in the world had been exiting its shareholdings across the IIFL Group over the year.

FIH Mauritius, an affiliate of Fairfax Holdings (Watsa’s Firm) offloaded an additional 5.7% the day after the above piece of news was reported on 21st December 2023.

So yes, a vigilant Investor probably “should have seen it coming”

I also think that the latest denouncement from RBI is NOT a one-off, it is a deeper issue that probably runs deep and wide.

Regards

Rahul Rao

Senior Analyst

CFA Level 3 Candidate

Aerospace Engineer

Investing since 2014

Disclaimer: I am NOT a SEBI Registered Investment Advisor. The above must NOT be construed as investment advice. Your decisions are your responsibility.