IIFL Finance Limited Ratings reaffirmed at 'CRISIL AA / CRISIL PPMLD AA r / CRISIL A1+ '; outlook revised to 'Stable'
Rating Action
1 crore = 10 million Refer to Annexure for Details of Instruments & Bank Facilities *Interchangeable between secured and subordinated debt #For Retail Bond Issuance |
Detailed Rationale CRISIL Ratings has revised its rating outlook on the long-term debt instruments and bank facilities of IIFL Finance Limited (IIFL Finance) to 'Stable' from 'Negative' while reaffirming the long term rating at 'CRISIL AA/CRISIL PP-MLD AAr'. The short term rating has been reaffirmed at 'CRISIL A1+'.
CRISIL Ratings has also withdrawn ratings on Rs 98 crore non-convertible debentures (NCDs) and Rs 150 crore subordinated debt, at the company's request as there is no amount outstanding against the rated instruments. This is in line with CRISIL Rating’s withdrawal policy.
In June 2020, CRISIL Ratings had revised the outlook on the ratings to Negative, amidst the expectation of pressure on IIFL Finance’s asset quality due to the challenging macro-economic environment which had impacted the income streams of borrowers, particularly the self-employed and cash salaried segments. Further, the company's fundraising, which had seen an improvement in the fourth quarter of fiscal 2020, was impacted in the months prior to June 2020, in-line with peers
The current outlook back to ‘Stable’ revision factors in the continuous improvement in collection efficiency [1](excluding foreclosures) resulting in the uptick in asset quality metrics being lower than previous expectations despite weak macro-economic environment. The outlook revision also factors in the improvement in fund raising of the company.
The overall ratings, continues to reflect the IIFL Finance group's diversified retail product offerings with majority of the portfolio towards inherently less risky asset classes, the extensive branch network and adequate capitalisation. These rating strengths are partially offset by limited seasoning of the loan portfolio.
With gradual opening up of the economy, collection efficiency for the company has improved considerably to pre-pandemic levels from the lows of 30-35% in April 2020. On a segmental basis, for the month of December 2020, collection efficiency has improved to 98-100% for home loans, 85-90% for business loans, more than 100% in gold loans and micro-finance segment, indicating recoveries even from overdue accounts. Further, collection efficiency has sustained the trend till February 2021.
On asset quality, gross non-performing assets (NPAs), on a reported basis, have improved to 1.61% as on December 31, 2020 from 2.3% as on March 31, 2020, however, on a proforma basis (excluding the benefit of the Supreme Court order on asset classification standstill), gross NPAs have inched up to 2.87% as on December 31, 2020. Now with the benefit of standstill on asset classification removed, reported asset quality metrics will see an inch up in March 2021; however, the performance is expected to better than earlier envisaged. Even in terms of restructuring, the overall restructuring at around 2% of the assets under management (AUM) is lower than earlier expectations.
As on December 31, 2020, 61% of the AUM is towards safer asset classes of gold loans and home loans; however, 15% of AUM is towards relatively riskier asset classes of unsecured business loans and real estate & developer finance. As on December 31, 2020, 5% of the AUM is towards unsecured business loans, wherein the company has seen inch up in delinquencies in the first nine months of fiscal 2021, with gross NPAs (on a proforma basis) increasing to 11.0% (2.5% on a reported basis) as on December 31, 2020 from 5.2% (reported) as on March 31, 2020. While management has become cautious in lending towards this sector in the past few quarters, performance of this book over the next few quarters will be a monitorable. Further, around 10% of the AUM is towards real estate & developer finance, wherein borrowers are susceptible to an environment of prolonged liquidity tightness. IIFL Finance has provided temporary respite by extension of date of commencement of commercial operations (DCCO) for commercial real estate projects, which formed around 51% of the real estate & developer book as on December 31, 2020. Nevertheless, the management is planning to move the real estate book aggregating Rs 3,600 crore to an alternative investment fund (AIF) platform with investment by global marquee investors. While the detailed contours of the deal are yet to be closed, sale of the real estate book at a haircut could have an impact on the earnings profile of the company and will be a monitorable.
Also, with the recent surge in cases and localized lockdowns being imposed across the country, any impact on the collection efficiency and income streams of the borrowers will be a monitorable.
On the resources front too, the company has been able to raise funds across instruments, supported partly by the various schemes announced by the Reserve Bank of India (RBI) and the Government of India (GoI). Further, there has been a significant pick-up in recent months with the company raising around Rs 8,448 crore in the quarter ended December 2020 (Rs 14,434 crore for the nine months ended December 2020). Around 56% of this was in the form of securitisation/assignment of loans.
Adequate fund raising has also enabled IIFL Finance to grow its AUM in the last few quarters. In the nine months ended December 31, 2021, IIFL Finance has disbursed around Rs 19,839 crore, driven primarily by gold loans. Consequently, AUM grew by 11% year to date (YTD) to Rs 42,264 crore from Rs 37,951 crore as on March 31, 2020; growth was higher than industry average during the period. With pickup in disbursements, especially towards higher yielding products like gold loans, there has been a substantial improvement in the earnings profile despite increased credit costs (2.4% for the nine months through December 2020; 1.2% for fiscal 2020) on account of write-offs and Covid-19 related provisions. IIFL Finance has reported annualized return on managed assets (RoMA) of 1.5% for the nine months ended December 31, 2020, as against 1.2% for fiscal 2020. Nevertheless, ability to improve profitability from current levels will remain a monitorable.
As on February 28, 2021, the company had a liquidity cushion of Rs 3,982 crore (Rs 555 crore of cash and equivalents, Rs 647 crore on unutilized cash credit lines and Rs 2,779 crore of unutilized bank lines including securitization lines). Against this, it has total debt obligations (principal and interest) of Rs 3,653 crore over the five months through July 2021. [1] Collection efficiencies have been calculated as the proportion of actual collections (from billings for the month and overdues but excluding prepayments) during the month to scheduled collections/ billings for the month (this takes into account the dues from the book assuming there was no moratorium). |
Analytical Approach CRISIL Ratings has consolidated the business and financial risk profiles of IIFL Finance and its subsidiaries, including IIFL Home Finance Ltd (IIFL Home) and Samasta Microfinance Ltd (Samasta). This is because all these entities, collectively referred to as the IIFL Finance group, have significant operational, financial, and managerial integration and also operate under a common brand. Further, CRISIL Ratings has also factored in the business synergies that IIFL Finance group will have with IIFL Wealth Management Ltd and IIFL Securities Ltd, given their common promoters and the shared brand.
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:
The IIFL Finance group, having consolidated assets under management (AUM) of Rs 42,264 crore as on December 31, 2020 (Rs 37,951 crore as on March 31, 2020; Rs 34,904 crore as on March 31, 2019), is primarily engaged in secured lending across various retail asset classes. IIFL Finance has two lending subsidiaries, IIFL Home and Samasta, which carry out the mortgage finance and microfinance businesses, respectively.
Retail loans accounted for almost 90% of the AUM as on December 31, 2020, with a high level of granularity (loans of less than Rs 1 crore). Also, more than 40% of the portfolio qualifies under priority sector lending. The group had identified four key segments - home loans, business loans (including loan against property {LAP} and lending to micro small and medium enterprises—MSME), gold loans and microfinance, as key growth drivers over the medium term. These four segments form around 89% of the AUM as on December 31, 2020, up from 61% as on March 31, 2016. The group has also been operating in two synergistic segments - construction & developer funding and capital market lending. The developer funding book is proposed to be transferred to an AIF. Capital market lending will largely focus on the retail clients of IIFL Securities. In-line with the strategy to focus on select segments, the group discontinued medical equipment financing from fiscal 2018, and also sold its commercial vehicle (CV) finance portfolio in fiscal 2019.
As of December 31, 2020, the IIFL Finance group had a wide network of 2,439 branches spread across 25 states. The group has invested substantially in technology to effectively benefit from its geographical reach. Going forward, the group plans to leverage business synergies with other IIFL entities for cross-selling of financial products (such as insurance and mutual funds) and retail loan products, given the already established branch and distribution platform.
On a standalone level, IIFL Finance had an AUM of Rs 18,565 crore as on December 31, 2020 (Rs 16,057 crore as on March 31, 2020) primarily towards gold loans (66%), business loans (13%) and developer and construction finance (18%).
IIFL Home had an AUM of Rs 19,743 crore as on December 31, 2020 (Rs 18,495 crore as on March 31, 2020) largely toward home loans (68%), followed by LAP (27%) and construction finance (5%).
Samasta had an AUM of Rs 3,956 crore as on December 31, 2020 (Rs 3,400 crore as on March 31, 2020).
The IIFL Finance group is adequately capitalised, with a consolidated networth of around Rs 5,233 crore as on December 31, 2020 (Rs 4,766 crore as on March 31, 2020). Networth coverage for net non-performing assets (NPAs) was comfortable at around 22 times as on December 31, 2020 (17 times as on March 31, 2020). On-book gearing as on same date was adequate at around 5.0 times; however, CRISIL Ratings–adjusted gearing (on-book borrowings + securitization/assignment) was higher at around 7.8 times. Nevertheless, the group has demonstrated its ability to raise capital from long-term marquee investors such as Fairfax and the CDC group (Rs 1000 crore raised from CDC in fiscal 2017). Also, the company has recently raised subordinated bonds to boost capitalization levels. Given the growth plans, capitalisation should remain adequate for the current scale of operations. However, the ability to raise capital and manage leverage levels over the medium term will be an important factor.
As on December 31, 2020, IIFL Finance (standalone) had a net worth and CRISIL Ratings- adjusted gearing stood at Rs 3,745 crore and 5.2 times, respectively. It had a Tier-I capital adequacy ratio (CAR) and overall CAR of 18.0% and 21.4%, respectively, as on same date. Networth coverage for net NPAs was around 42 times.
As on December 31, 2020, IIFL Home had a networth and CRISIL Ratings- adjusted gearing of Rs 2,064 crore and 9.0 times, respectively. Its Tier-I and overall CAR stood at 20.3% and 24.8%, respectively, as on same date. Networth coverage for net NPAs was around 14 times.
As on December 31, 2020, Samasta’s net worth and CRISIL Ratings-adjusted gearing stood at Rs 632 crore and 5.1 times, respectively. Tier-I and overall CAR were 19.4% and 23.6%, respectively.
Weakness:
IIFL Finance group’s loan portfolio (excluding CV finance) has recorded a three-year compound annual growth rate of around 25%. Given the scale up of the loan book in recent years and entry into newer segments, the portfolio remains unseasoned and hence, overall asset quality is yet to be tested through cycles. While certain products have a shorter tenure, and hence, have seen a complete cycle, home loans and MSME lending have limited seasoning so far. Home loans are long tenure products and MSME lending is a recent addition to the product suite. Reported gross NPAs and net NPAs stood at 1.61% and 0.77%, respectively, as on December 31, 2020 (2.31% and 0.97%, respectively, as on March 31, 2020). However, on a proforma basis (excluding the benefit of the Supreme Court order on asset classification standstill), gross NPAs and Net NPAs stood at 2.87% and 1.46% as on December 31, 2020. Also, while increasing focus on small-ticket retail loans will benefit the inherent asset quality over the medium term, ability to underwrite and maintain strong credit practices across asset classes, amid stiff competition from established players, remains to be seen.
NPAs in the wholesale book declined, supported partly by write-offs, to 2.7% as on December 31, 2020, from 3.8% as on March 31, 2020, but remained high. Nevertheless, the share of wholesale lending has come down over the past few years (10% of the overall AUM as on December 31, 2020). However, given the current macro environment, asset quality on exposures such as developer loans and large ticket LAP would be a key monitorable for all lenders, including IIFL Finance.
While retail asset quality has remained under control in the past, it would witness an increase in delinquencies across segments by March 2021 due to removal of the standstill on asset qualification. Any sharp deterioration in asset quality, will also impact profitability and capital, and remains a key rating monitorable.
Gross NPA of IIFL Finance (standalone), IIFL Home and Samasta stood at 1.7%, 1.4% and 2.2%, respectively, as on December 31, 2020 (3.1%, 1.6% and 1.5%, respectively, as on March 31, 2020). |
Liquidity: Strong As on February 28, 2021, the company had a liquidity cushion of Rs 3,982 crore (Rs 555 crore of cash and equivalents, Rs 647 crore on unutilized cash credit lines and Rs 2,779 crore of unutilized bank lines including securitization lines). Against this, it has total debt obligations (principal and interest) of Rs 3,653 crore over the five months through July 2021. |
Outlook: Stable CRISIL Ratings believe that IIFL Finance will maintain its diversified product offerings and adequate capitalisation levels. Also, CRISIL Ratings expects collection efficiency and thereby asset quality metrics to remain under control in the near to medium term. |
Rating Sensitivity factors Upward Factors:
Downward Factors:
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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 (NBFC). The group offers various retail lending products, including gold loans, home loans, LAP, business loans, microfinance and capital market based lending (margin funding and loans against shares). It also offers construction and developer finance.
In fiscal 2008, IIFL Finance (erstwhile IIFL Holdings Limited) launched its retail finance business through the NBFC, Moneyline Credit Ltd, which was merged with India Infoline Finance Ltd. In fiscal 2009, India Infoline Housing Finance Ltd received registration as a housing finance company from the National Housing Bank and was subsequently renamed as IIFL Home Finance Limited. In fiscal 2017, IIFL Finance ventured into microfinance after the acquisition of micro lender Samasta Microfinance.
In January 2018, IIFL Finance announced plans to reorganise its corporate structure, and list IIFL Finance (loans and mortgages business), IIFL Wealth Management Limited (wealth and asset management business), and IIFL Securities Limited (capital markets and other businesses). As part of the restructuring scheme, IIFL Wealth Management Limited and IIFL Securities Limited were demerged from IIFL Finance in May 2019 and were listed in September 2019. In March 2020, India Infoline Finance Ltd was merged into IIFL Finance, the listed entity of the lending business.
As of December 31, 2020, promoters held 24.98% stake in IIFL Finance, while 29.86% is held by Prem Watsa controlled Fairfax Holdings and 15.46% by CDC Group PLC.
CRISIL Ratings has also analysed the standalone financials of IIFL Finance. The company reported a total income (net of interest expenses) and profit after tax (PAT) of Rs 1,385 crore and Rs 149 crore, respectively, in fiscal 2020, against Rs 1,597 crore and Rs 451 crore, respectively, in the previous fiscal. For the nine month ended December 31, 2020, the company reported a total income (net of interest expenses) and profit after tax (PAT) of Rs 1,298 crore and Rs 183 crore, respectively, against Rs 983 crore and Rs 132 crore, respectively, in the corresponding period of the previous fiscal.
IIFL Finance (consolidated) had total income (net of interest expenses) and PAT of Rs 2,424 crore and Rs 503 crore (including one-time exceptional expense of Rs 261 crore (post tax), respectively, in fiscal 2020 as against a total income (net of interest expense) of Rs 2,500 crore and PAT of Rs 796 crore (including one-time exceptional gain of Rs 105 crore) in the previous fiscal. Excluding the exceptional items (gain and expenses), PAT stood at Rs 764 crore for FY20 as against a PAT of Rs 691 crore in the previous fiscal. For the nine months ended December 31, 2020, the company had a total income (net of interest expenses) and profit after tax (PAT) of Rs 2,396 crore and Rs 513 crore, respectively, against Rs 1,785 crore and Rs 445 crore, respectively, in the corresponding period of the previous fiscal. |
Key Financial Indicators IIFL Finance (consolidated; CRISIL Ratings adjusted numbers)
Excluding the one-time exceptional items, PAT and RoMA stood at Rs 764 crore and 1.8%, respectively, for fiscal 2020 as against Rs 691 crore and 1.9%, respectively, for fiscal 2019
IIFL Finance (standalone; CRISIL Ratings adjusted numbers)
Note: Excluding commercial vehicle business |
Any other information: Earnings profile of the company has remained range bound. Return on managed assets [RoMA; profit after tax / (total assets + securitization/assignment)] stood at around 1.2% for the period ended March 31, 2020. The profitability was impacted in fiscal 2020 due one-time provisioning for Covid-19 of Rs 282 crore and reversal of deferred tax of Rs 50 crore, excluding the same, RoMA stood at 1.8% for the above period (around 1.9% for fiscal 2019; excluding the one-time gain on sale of CV business). Further, in the nine months ended December 31, 2020, the company took additional Covid-19 related provisions of Rs 327 crore, with total Covid-19 contingent provisions of Rs 609 crore as on December 31, 2020. While the profitability is supported by healthy net interest margin, operating expenses remain high, given the investment in opening of new branches, strengthening of work force and building the technological infrastructure. With the scale up of loan book, operating efficiency is expected to improve gradually, which will support the earning profile. Also, credit costs have remain elevated in the first nine months of fiscal 2021 due to up-fronting of provisions, however, the same are expected to remain range bound next fiscal. Ability of the company to control credit costs will be a key determinant of profitability going forward. |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
**not yet issued # Interchangeable between secured and subordinated debt &For Retail Bond Issuance
Annexure - Details of Rating Withdrawn
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Annexure – List of entities consolidated
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