IIFL Finance placed on 'Rating Watch Negative' by Fitch Ratings

Fitch plans to use this "Watch Period," typically up to six months, to gather information on the remediation process and the company's broader performance following this event.

A Rating Watch Negative action indicates that the rating could remain unchanged or be downgraded upon the resolution of the watch.

The RWN reflects downside risks to IIFL Finance's franchise, profitability and overall risk profile if regulatory restrictions on new gold-backed lending are prolonged, Fitch Ratings wrote.

"As such, the company will continue to earn income on its outstanding gold-loan portfolio until the balance matures," the ratings agency said, adding that the financial implication will depend on the length of the restrictions, balanced against the company's ability to maintain other lending activities, which have not been cited in the ruling.

The regulatory action cited a number of instances of non-compliance within IIFL's gold loan business.

"We believe this signifies gaps in the entity's governance framework in ensuring sound practices and policies, and in the operational execution of its gold-loan strategy," Fitch Ratings wrote.

Fitch Ratings believes that the recent developments raise IIFL Finance's exposure to regulatory compliance and reputational risk. "Franchise risk could extend beyond the gold-loan portfolio, if the repercussions spill over into the company's other product lines," the note said.

The gold-loan segment contributes a significant proportion of IIFL Finance's revenue and profit, considering the product's higher yield.

Earlier on Thursday, brokerage firm HSBC also downgraded IIFL Finance to "reduce" from its earlier recommendation of "buy" and also slashed its price target to ₹340 from ₹790 earlier.

The brokerage wrote that other IIFL businesses may be forced to moderate growth, while actions of lenders and credit rating agencies remain uncertain.

As a result, HSBC cut its financial year 2025 - 2026 Earnings Per Share (EPS) estimates by 21% to 38% for IIFL Finance.

IIFL Finance was also downgraded by Jefferies on March 6.

Shares of IIFL Finance ended 2.5% lower on Thursday at ₹375.