IIFL Finance and JM Financial Products are currently facing increased scrutiny from the Reserve Bank of India (RBI) following recent regulatory action. The central bank has initiated a special audit of these two non-banking finance companies by issuing an e-tender to solicit interest from firms. The purpose of this special audit is to thoroughly investigate the operations and conduct of these companies.
The RBI has called upon audit firms empanelled by the Securities and Exchange Board of India (Sebi) for forensic audits to participate in the tendering process. As per the communication on the RBI’s website, the selected firms will be awarded work on April 12, 2024.
The heightened scrutiny comes after the central bank prohibited JM Financial from extending loans against shares and bonds due to serious deficiencies in financing Initial Public Offerings (IPOs) and bond offerings. In response, JM Financial has stated that it has not violated any applicable regulations and is willing to cooperate with the RBI. The company’s financial products unit has asserted that it has not found any “material deficiencies” in its loan processes and that the IPO financing business contributed only 0.3% of the parent company’s profit for the nine-month period ending in December.
In addition to the loan restrictions, JM Financial has also been disallowed from acting as a manager for any new public debt issue. Similarly, IIFL Finance was directed to cease the sanctioning or disbursing of gold loans following the RBI’s discovery of “material supervisory concerns” in its portfolio. In response, IIFL has expressed its commitment to complying with the RBI’s findings.
It is important to note that shadow lenders like IIFL and JM Financial play a crucial role in extending credit to clients outside the traditional banking network, particularly small businesses with irregular cash flow. Despite their importance, the RBI has been cautioning financial services firms for months to enhance their governance and risk assessment systems.
The RBI’s increased vigilance comes at a time when bad debts are at a more than a decade low. Nevertheless, the regulator has intensified its oversight of unsecured lending and instructed banks to increase provisions for other loans. Furthermore, officials have been warning about lapses in customer verification to protect against potential fraud and money laundering.
As the regulatory scrutiny continues, it is imperative for financial services firms to prioritise compliance and risk management to uphold the stability and integrity of the financial system.
Source: Living Media India Limited