RBI Restriction on IIFL Gold Loans Results in Rising Borrowing Costs for Entrepreneurs
New Delhi: Despite the government’s push to boost MSMEs with new schemes, there are ground realities to reckon with. The Reserve Bank of India’s (RBI) recent ban on IIFL Finance’s gold loan business has left many small entrepreneurs in Assam are in dire straits, forcing them to seek loans from moneylenders charging astronomical interest rates of up to 60% per annum.
IIFL Finance, which claims to serve sixty lakh customers, primarily small entrepreneurs from unbanked and underbanked segments, was debarred from disbursing new loans on March 4, 2024, due to procedural violations. This ban on IIFL Finance, the second-largest gold loan non-bank financier in India, has had a crippling effect on small businesses across 1,000 towns and villages where IIFL operated through its 2,700 branches, employing over 15,000 people.
Arshi, a customer of IIFL Finance from Tughlakabad said that she was feeling secure and satisfied with her experience with IIFL Gold loan, but after the ban by RBI she is forced to take loans from other sources at much higher interest rates.
Rajesh, an eyewear shop owner from Delhi said, “he is stressed in managing his operations as he is forced to take loans at higher interest rates after the IIFL gold loan ban. I have been a customer of IIFL Finance for six years and have benefited from the lower interest rates and customer services.” Deepak Gupta, a hardware shop owner in Meerut expressed similar views and feared his business will be affected with higher interest rates in absence of IIFL.
Gold loans have been a major source of credit for small entrepreneurs in rural and semi-urban India, where formal banking access is limited. Gold loan NBFCs like IIFL have been filling this credit gap through their extensive branch networks and strong local community connections, helping entrepreneurs avoid the debt traps set by unorganized moneylenders.
Manish Mayank, Zonal Head of IIFL Finance Gold Loan business, stated, “We receive thousands of queries daily from customers for loans, but since we cannot provide due to the regulatory ban, we try to connect them with regulated banking or non-banking institutions. However, in many areas where such institutions are not present, small entrepreneurs have to turn to moneylenders charging exorbitant rates of interest. But we are trying our best to guide them to avoid such traps. It is our moral responsibility.”
The RBI banned IIFL Finance’s gold loan business in early March 2024 for process-related lapses, including issuing cash loans exceeding Rs 20,000. The RBI later found this to be an industry-wide practice and issued a notification to all gold loan companies to cease such practices in early May 2024. An RBI-appointed auditor completed a special audit on IIFL in April, with the report submitted in early June. The RBI is expected to decide on lifting the ban based on this report. Meanwhile, NITI Aayog and many government authorities have emphasized the urgent need to ensure that vulnerable small entrepreneurs should not fall into the clutches of predatory moneylenders.
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