IIFL Gold Loan Ban by RBI Drives Entrepreneurs to High-Interest Borrowing

New Delhi: Despite the government’s efforts to boost MSMEs with various schemes, small entrepreneurs face significant challenges. The Reserve Bank of India’s (RBI) recent ban on IIFL Finance’s gold loan business has left many small business owners in Assam struggling, forcing them to resort to moneylenders who charge exorbitant interest rates of up to 60% per annum.

IIFL Finance, known for serving over six million customers, primarily small entrepreneurs in unbanked and underbanked areas, was barred from issuing new loans on March 4, 2024, due to procedural violations. As the second-largest gold loan non-banking financial company (NBFC) in India, IIFL’s suspension has severely impacted small businesses in over 1,000 towns and villages where it operated through its 2,700 branches, employing more than 15,000 people.

Arshi, a customer from Tughlakabad, shared that she felt secure and satisfied with IIFL Gold loans. However, since the RBI’s ban, she has had to seek alternative loans at significantly higher interest rates. Similarly, Rajesh, an eyewear shop owner in Delhi, expressed his stress over managing his business operations without access to IIFL’s lower interest loans. He mentioned that as a six-year customer of IIFL Finance, he had greatly benefited from their services. Deepak Gupta, a hardware shop owner in Meerut, echoed these concerns, fearing the impact of higher interest rates on his business in the absence of IIFL.

Gold loans have been a critical source of credit for small entrepreneurs in rural and semi-urban India, where formal banking services are often scarce. NBFCs like IIFL have bridged this credit gap, providing much-needed financial services through their extensive branch networks and strong community ties, helping entrepreneurs avoid the pitfalls of unregulated moneylenders.

Manish Mayank, Zonal Head of IIFL Finance’s Gold Loan business, stated, “We receive thousands of queries daily from customers seeking loans. Due to the regulatory ban, we can’t provide them, but we try to connect them with regulated banking or non-banking institutions. In areas lacking these institutions, however, small entrepreneurs are left with no choice but to turn to moneylenders charging exorbitant rates. We strive to guide them away from such predatory practices, seeing it as our moral responsibility.”

The RBI’s ban on IIFL Finance’s gold loan operations came after identifying process-related issues, such as issuing cash loans exceeding Rs 20,000. In early May 2024, the RBI recognized this as a widespread industry issue and issued a directive to all gold loan companies to halt these practices. A special audit of IIFL was completed by an RBI-appointed auditor in April, with the report submitted in early June. The RBI’s decision on lifting the ban will depend on this report. Meanwhile, NITI Aayog and other government bodies have stressed the need to protect vulnerable small entrepreneurs from predatory moneylenders.