Detailed Rationale CRISIL Ratings continues its ‘CRISIL AA/CRISIL PPMLD AA/CRISIL AA-’ ratings on the bank facilities and debt instruments of IIFL Finance Limited (IIFL Finance) on ‘Rating Watch with Developing implications’. Short term rating has been reaffirmed at ‘CRISIL A1+'.
The ratings were placed on watch with developing implications following the directive issued by the Reserve Bank of India (RBI) on March 04, 2024, ordering IIFL Finance to cease and desist from sanctioning and disbursing gold loans, or assigning/securitising/selling any of its gold loans. However, the RBI has allowed the company to continue servicing its existing gold loan portfolio, through usual collection and recovery processes.
CRISIL Ratings understands that IIFL Finance is in continuous engagement with the RBI and the restriction imposed would be reviewed upon completion of a special audit by the regulator in due course. The chairman of the board of IIFL Finance, who is also an independent director, has stated that the company has addressed all the gaps cited by the regulator and has is fully compliant with all RBI requirements as on March 11, 2024. Further to this, RBI has floated a tender on March 22, 2024 for the special audit of IIFL Finance. In light of this issue and the impending special audit, CRISIL Ratings will continue to closely monitor the developments pertaining to this restriction and the time taken for revocation of the same.
At this juncture, the fast-liquidating nature of the gold loan portfolio is expected to support the short-term liquidity position of the company. This is further augmented by a commitment of $200 million (~Rs 1,560 crore) liquidity line by Fairfax India – which has been a long-term strategic investor in IIFL Finance and currently holds 15.1% in the company.
In the near term, this restriction on the gold loan business will lead to reduction in overall AUM, while other key businesses of the group viz, home loans, microfinance, loan against property and others, are not directly impacted by this RBI directive. However, the issues raised by the regulator bring forth questions on the operational processes and compliances. These developments could have a second order impact on fund raising for the group given the confidence sensitive nature of the funding environment for NBFCs - which could, in turn, impact growth in the other segments, and will remain a key monitorable. In a scenario where this restriction is not lifted for a prolonged period, the company’s business risk profile and profitability could be impacted in the medium to long run. The watch shall be resolved once greater clarity emerges on RBI’s subsequent decisions on this matter.
The ratings continue to be supported by the group’s comfortable capitalisation, its established track record of operations in home loans and microfinance segments, and sustained profitability metrics, supported by stable asset quality. These strengths are partly offset by limited diversity in the resource profile, with moderately higher cost of funds vis-à-vis some of the peers.
Consolidated AUM stood at Rs 77,444 crore as on December 31, 2023, with gold loans accounting for 32%. Housing finance and microfinance, which form 33% and 16%, respectively, are carried out via subsidiaries, IIFL Home Finance Ltd (IIFL Home) and IIFL Samasta Finance Ltd (IIFL Samasta). In terms of the earnings profile, the group reported return on assets (RoA) and managed assets (RoMA) of 3.7% and 2.5% (both annualised), respectively, for the first nine months of fiscal 2024, vis-à-vis 3.3% and 2.3%, respectively, in fiscal 2023 and 2.7% and 2.1%, respectively, in fiscal 2022. This has been underpinned by controlled credit cost and upfront income from direct assignment (DA) transactions, and its sustenance considering any potential changes in the business model following the restrictions, remains a monitorable. The group has demonstrated ability to raise capital from long-term marquee investors, such as Fairfax, the CDC group and Abu Dhabi Investment Authority (ADIA). However, the resource profile is marked by limited diversity and higher cost of borrowings, compared with peers. Any impact of recent developments on the resource raising ability of the group, is a monitorable.
The rating on the perpetual bonds reflects the extent of buffer over the regulatory capital adequacy requirements. CRISIL Ratings believes that IIFL Finance will maintain this cushion, going forward. |
Analytical Approach CRISIL Ratings has consolidated the business and financial risk profiles of IIFL Finance and its subsidiaries, including IIFL Home and IIFL Samasta. This is because all the companies, collectively referred to as the IIFL Finance group, have significant operational, financial and managerial integration, and operate under a common brand.
The ratings on the perpetual bonds additionally factor in the deeply subordinated nature of these instruments, whereby IIFL Finance is restricted from servicing these instruments if it breaches the minimum regulatory capital requirement, or if the regulator denies permission to the company to make payments of interest and principal, if it reports losses.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Comfortable capitalisation, supported by demonstrated ability to raise capital and an asset-light business model The group has demonstrated its ability to raise capital from long-term marquee investors, such as Fairfax and the CDC group in the past. IIFL Home has also raised Rs 2,200 crore as primary equity from ADIA in the second quarter of fiscal 2023. Consequently, consolidated networth improved to Rs 11,787 crore as on December 31, 2023 (Rs 10,202 crore as on March 31, 2023, and Rs 6,470 crore as on March 31, 2022), and adjusted gearing to 3.6 times (as against 3.9 times and 5.5 times, respectively). Networth coverage for net non-performing assets (NPAs) was comfortable at 29 times as on December 31, 2023. Given the growth strategy and the asset-light business model, capitalisation should remain comfortable for the projected scale of operations over the medium term.
IIFL Finance reported a standalone networth and gearing of Rs 5,459 crore and 3.3 times, respectively as on December 31, 2023, Tier I capital adequacy ratio (CAR) and overall CAR stood at 12.5% and 19.6%, respectively, as on the same date. Networth coverage for net NPAs was around 47 times. IIFL Home had networth and gearing of Rs 6,304 crore and 2.6 times, and Tier I and overall CAR of 40.1% and 45.8%, respectively, and networth coverage for net NPAs of around 24 times. As on December 31, 2023, IIFL Samasta reported networth and gearing of Rs 1,904 crore and 4.5 times, respectively. Tier I and overall CAR on the same date were 18.5% and 24.2%, respectively.
Established track record of operations and extensive branch network; implications of current restrictions on the market position is monitorable Consolidated AUM stood at Rs 77,444 crore as on December 31, 2023 (Rs 64,638 crore as on March 31, 2023, and Rs 51,210 crore, a year earlier) majority of which were deployed in retail asset classes. Two lending subsidiaries, IIFL Home and IIFL Samasta, are engaged in mortgage finance and microfinance, respectively. The group is among the top three players in the microfinance segment, whereas it had the second highest market share, among standalone gold financiers. In the affordable housing space, the group extends loans of average ticket size of Rs 20 lakhs and within this sub-segment, it is a prominent player. Retail loans (ticket size less than Rs 1 crore) accounted for 96% of the consolidated AUM as on December 31, 2023, making the portfolio highly granular. Also, 67% of the portfolio, excluding gold loans, qualified under priority sector lending. As on December 31, 2023, the group was present across five key segments: home loans (33% of AUM), gold loans (32%), LAP (9%), digital loans (5%) and microfinance (16%), which together accounted for 95% of the AUM, up from 67% as on March 31, 2017.
Till the restrictions are lifted, the gold loan portfolio will continue to run down organically. Any developments stemming from this restriction, hindering the group’s ability to grow its non-gold portfolio, will be a key sensitivity factor. Apart from these, there are two non-core, but synergistic segments: construction and real estate (CRE) funding and capital market lending. The group has been consciously scaling down its book under these segments, which together formed only 5% of the AUM. Under CRE, the group finances completion of projects already funded by it and is also looking at providing smaller ticket construction finance through IIFL Home, as it will be synergistic to its core business. In the capital market segment, the group finances retail clients of IIFL Securities Ltd. Market position benefits from a wide network of 4,681 branches as on December 31, 2023, which allows the group to cross-sell financial products of other IIFL entities.
On a standalone level, IIFL Finance had an AUM of Rs 31,430 crore as on December 31, 2023 (Rs 25,573 crore as on March 31, 2023, and Rs 21,109 crore a year earlier), primarily comprising gold loans (79%), digital loans (12%), developer and construction finance (7%) and capital markets (2%). IIFL Home had an AUM of Rs 32,937 crore as on December 31, 2023 (Rs 28,512 crore as on March 31, 2023), comprising home loans (78%), followed by LAP (20%) and construction finance (2%). IIFL Samasta had an AUM of Rs 13,077 crore as on December 31, 2023 (Rs 10,552 crore as on March 31, 2023, and Rs 6,484 crore as on March 31, 2022).
Sustained profitability metrics supported by stable asset quality Consolidated RoA and RoMA improved to 3.7% and 2.5%, respectively, in the 9M of fiscal 2024 from 3.3% and 2.3%, respectively, for fiscal 2022. On an absolute basis, consolidated net profit was Rs 1,544 crore in the 9M of fiscal 2024 and Rs 1,608 crore in fiscal 2023 (Rs 1,188 crore in the previous fiscal). Earnings continue to be supported by lower credit cost (provisions and write-offs/average managed assets) and upfront income from DA transactions. Credit cost was marginally better at 1.2% during 9M of fiscal 2024 vis-à-vis 1.2% in fiscal 2023 (1.6% in fiscal 2022).
On consolidated and standalone basis, gross NPAs (GNPAs) of IIFL Finance stood at 1.7% and 1.4%, respectively, as on December 31, 2023 (1.8% and 1.6%, respectively, as on March 31, 2023 and 3.2% and 2.9%, respectively, as on March 31, 2022). GNPAs spiked during March 2022 was due to the impact of the notification released by the RBI on November 12, 2021. Provision coverage ratio[1] as on December 31, 2023, stood at 50%, while the total provisions coverage ratio (total provisions/GNPA) was 151%. On a standalone basis, IIFL Home and IIFL Samasta reported GNPAs of 1.8% and 2.1%, respectively, as on December 31, 2023 (2.2% and 2.1%, respectively, on March 31, 2023, and 3.1% and 3.1%, respectively, on March 31, 2022). GNPAs for the home loan segment stood at 1.6%, for the gold loan portfolio at 0.8%, LAP at 2.7%, digital loans at 2.8% and microfinance at 2.1% as on December 31, 2023
Ability to keep delinquencies under check and manage credit cost will remain critical for sustaining healthy profitability. With regard to the gold loan business, until the restrictions are lifted – the extent of decline in profitability, if any, remains a monitorable.
Weakness: Limited diversity in resource profile with comparatively higher cost of funds; degree and nature of impact, if any, the current restrictions shall have on the resource raising ability, is a key rating sensitivity factor As on December 31, 2023, banks and financial institutions (FIs) constituted 72% of the on-book borrowings of the group-these were in the form of term loans (43%), refinance (18%), external commercial borrowings (9%), securitisation (1%) and short-term borrowings (1%). The remaining 28% of borrowings were in the form of non-convertible debentures (24%) and commercial paper (4%). Of this, capital market lenders (such as mutual funds, pension funds, trusts) had limited share. IIFL Finance group has been able to tap the public NCDs route but the cost of funds remains higher than some of the comparable peers. Nonetheless, the company has a comfortable liquidity profile with no negative cumulative mismatches across time buckets as per the asset liability maturity (ALM) statement dated December 31, 2023. In addition, the $200 million liquidity line committed by Fairfax India to IIFL Finance, should augment liquidity.
Under the prevailing regulatory developments, any potential impact on the liability franchise, especially in terms of resource raising ability or/and pre-mature calling of existing lines, is a key monitorable. Over the medium to long term, ability to diversify the resource base at an optimal cost will be a monitorable, given the relatively higher reliance on banks and FIs. [1]Provision coverage ratio = Provisions against GNPAs/GNPAs |
Liquidity: Strong As on December 31, 2023, the IIFL Finance group had liquidity of Rs 10,081 crore (Rs 5,157 crore of cash and equivalents, Rs 606 crore of unutilised cash credit limit and Rs 4,318 crore of undrawn sanctioned bank limits [including securitisation/DA limit]). Against this, total debt obligation was Rs 7,104 crore over the six months through June 2024.
On a standalone basis, IIFL Finance had surplus cash of Rs 907 crore as on March 21, 2024. This, along with expected collections of Rs 4,583 crore, should suffice to meet debt obligation of Rs 4,140 crore till August 2024. In addition, liquidity line ($200 million) committed by Fairfax India shall also provide a cushion.
Environment, social and governance (ESG) profile CRISIL Ratings believes that the ESG profile of the IIFL Finance group supports its credit risk profile.
The ESG profile of financial institutions typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and its role in promoting financial inclusion. While there is no direct adverse impact on the environment, lending decisions could have a bearing on environmental and other sustainability related factors.
The IIFL Finance group has demonstrated an ongoing focus on strengthening various aspects of its ESG profile.
Key ESG highlights of the IIFL Finance group IIFL Finance has replaced incandescent lights with light-emitting diode panels across branches. Rainwater harvesting systems have been installed and wastewater is treated and re-used for domestic purposes.
Of the total workforce at IIFL Finance, gender diversity stands at 26%, as on March 31, 2023. One of the nine board members is a woman.
Of the board members, 63% are independent directors and there is a split between positions of the chairman and CEO. Extensive investor grievance redressal disclosures and mechanism are in place.
There is growing importance of ESG among investors and lenders. The group’s commitment to ESG will play a key role in enhancing stakeholder confidence, given the substantial share of foreign investors as well as access to domestic capital market. |
Rating Sensitivity Factors Upward factors:* Sustained improvement in profitability, with RoMA reaching 2.8-3.0% on a steady state basis * Diversification of resource profile at optimal cost of funding * Improvement in market position, along with sound asset quality Downward factors:* Any further regulatory developments resulting in sustained weakening of the business profile * Restricted ability to raise resources at competitive rates * Weakening of asset quality, leading to decline in profitability, with consolidated RoMA remaining below 2% |
About the Company IIFL Finance is the listed holding company of the IIFL Finance group and is registered as a systemically important non-deposit-taking, non-banking financial company. The group offers various retail lending products, including gold loans, home loans, LAP, digital loans and microfinance loans, which are the core segments and form 95% of the AUM. Capital market-based lending (margin funding and loans against shares) and construction and developer finance form the balance of the AUM.
On a consolidated basis, IIFL Finance had total income (net of interest expenses) and profit after tax (PAT) of Rs 5,225 crore and Rs 1,608 crore, respectively, in fiscal 2023, against Rs 4,033 crore and Rs 1,188 crore in the previous fiscal. For the first nine months of fiscal 2024, the group reported total income (net of interest expense) and PAT of Rs 4,779 crore and Rs 1,544 crore, respectively.
On a standalone basis, IIFL Finance reported total income (net of interest expenses) and PAT of Rs 2,633 crore and Rs 806 crore, respectively, in fiscal 2023, as against Rs 2,491 crore and Rs 745 crore, respectively, in the previous fiscal. For the first nine months of fiscal 2024, total income (net of interest expenses) and PAT were Rs 2,018 crore and Rs 420 crore, respectively.
IIFL Home reported total income (net of interest expenses) and PAT of Rs 1,549 crore and Rs 790 crore, respectively, in fiscal 2023, against Rs 1,159 crore and Rs 578 crore, respectively, in fiscal 2022. For the first nine months of fiscal 2024, it reported total income (net of interest expense) and PAT of Rs 1,442 crore and Rs 744 crore, respectively. |
Key Financial Indicators IIFL Finance (consolidated; CRISIL Ratings-adjusted numbers)
Key financial indicators: IIFL Finance (standalone; CRISIL Ratings-adjusted numbers)
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Any other information: Not Applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#Interchangeable between secured and subordinated debt **Not yet issued &For retail bond issuance *Interchangeable with short-term bank loan facility |
Annexure – List of entities consolidated
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Criteria Details
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