Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Strong financial and managerial support from IIFL Finance

The parent will continue to provide support on an ongoing basis and in the event of distress, given its majority ownership and IIFL Samasta’s strategic importance to the group, and presence in the board of directors. The microfinance business is strategically important and helps diversify the financial product suite of the parent and expand its presence in the financial inclusion space. Also, the microfinance business is scalable and expected to grow significantly over the medium term. IIFL Samasta’s business is well established, growing at a healthy pace and it formed around 17% of the group’s AUM as on June 30, 2024. Regular financial support—through equity infusion—and strategic inputs from IIFL Finance have enabled the company to ramp-up operations. IIFL Finance has infused incremental capital of Rs 940 crore post-acquisition (in 2016), with the latest infusion of Rs 400 crore in calendar year 2023 and is expected to provide further capital on a regular basis. It also has representatives on the board and senior management of IIFL Finance is actively involved in managing the treasury. Hence, CRISIL Ratings believes IIFL Finance has a strong moral obligation to continue supporting IIFL Samasta.

Adequate capitalisation

Networth was adequate at Rs 2010 crore as on March 31, 2024, against Rs 1322 crore as on March 31, 2023. It further increased to Rs 2,130 crore as on June 30, 2024. The capital position is supported by regular infusions by the parent, IIFL Finance, as demonstrated in the past. The gearing improved to 4.6 times as on March 31, 2024, as against 5.4 times as on March 31, 2023 (5.3 times as on March 31, 2022). Gearing stood at 4.0 times as on June 30, 2024. The capital adequacy ratio (CAR) continued to be comfortable at 24.0% as on March 31, 2024 (against 17.1% as on March 31, 2023). Overall CAR were 27.04% as on June 30, 2024. Because of the parents’ ability and willingness to infuse capital when required, IIFL Samasta’s capitalisation is expected to remain adequate over the medium term in the normal course of business.

Above-average earnings profile

During fiscal 2024, the company’s profit after tax (PAT) has improved to Rs 503 crores with return on managed assets (RoMA) of 4.2% as against a PAT of Rs 128 crore with RoMA of 1.5% during fiscal 2023 (as against Rs 51 crore and 0.8%, respectively, during fiscal 2022). The credit cost for the fiscal 2024 (Provisions + last 12 months write-offs) stood at 3.5% as against 5.2% during fiscal 2023. The company wrote off Rs 388.73 crores and had a net loss of Rs 78.8 crore on sale of assets yo asset reconstruction company (ARC) during fiscal 2024 as against a write-off of Rs 450.9 crores and net loss on a sale to ARC transaction worth Rs 239.33 crores during fiscal 2023.

For the first quarter of fiscal 2025, PAT stood at Rs 119 crore with an annualized RoMA of 4.1%. For the quarter, credit cost (Provisions + last 12 months write-offs) increased to 3.9% which included Rs 100.12 crores of write offs. Nevertheless, given the pace of growth has remained high, the company’s ability to maintain asset quality (in order to avoid any potential credit costs) for sustaining its earnings profile will remain a key rating sensitivity factor.

Improving diversity in funding profile

IIFL Samasta has significantly improved the diversity in its resource profile since its acquisition by IIFL Finance. Resource profile as on June 30, 2024, comprises of bank funding (56.87%), Non-Convertible Debenture funding (8.46%), refinance (7.18%), commercial paper [CP (0.74%)], sub debt (5.18%), ass through certificate [PTC (2.19%)] and direct assignment (19.40%). In terms of cost of borrowing, it around 10.52% during fiscal 2024 as against 9.46% during fiscal 2023. Post increase in interest rates in the market, the cost of borrowing has seen some elevation in the past 3-4 quarters.

Weaknesses:

Geographic concentration in operations

Though diversifying gradually, the loan portfolio of IIFL Samasta is still highly concentrated with 49% of its overall portfolio as on June 30, 2024, housed in three states: Bihar (21.9%), Tamil Nadu (13.8%) and Karnataka (13.4%). The top five districts accounted for 9.9% of the loan book. The company as on June 30, 2024, has operations in 22 states. Of these, growth of disbursements in Bihar has been particularly rapid, reflected in the proportion of AUM in the state increasing from 1.1% as on March 31, 2018, to 21.9% as on June 30, 2024. However, there has been a spurt in microfinance lending in certain states such as Punjab (0.2%), Haryana (0.5%), Madhya Pradesh (3.8%) etc. due to Karza Mukt Bharat Abhiyan showing asset quality challenges in certain pockets, however the geographical concentration and growth in these regions have been limited, thus the ability of the company to manage portfolio quality in these regions is a key monitorable.

Average asset quality

The company’s 90+ days past due (dpd) adjusted for write-offs improved to 4.9% on March 31, 2024, as compared to 6.2% as on March 31, 2023. The company wrote off about Rs 388.8 crore during fiscal 2024 along with the sale to ARC of Rs 78.8 crore. The company’s 90+ days past due adjusted for write-offs increased to 5.8% as on June 30, 2024 with write-offs of about Rs 110.12 crore during the quarter. As far as collection efficiency is concerned, (including overdues but excluding prepayments) it reduced to ~95.3% in current fiscal till August 2024 in line with the MFI industry from ~97.5% during fiscal 2024. Recently due to over-leveraged borrowers and ground-level operational challenges given elections and intense heat wave coupled with Karza mukt bharat abhiyan campaign, there has been asset quality challenges across the industry.

CRISIL Ratings will nevertheless continue to monitor the situation and its likely impact on credit losses as it evolves. Additionally, considering the pace of growth, the company’s ability to sustain collection efficiency and eventually reach ~98-99% on a steady-state basis will remain a key monitorable.

Potential risk from local socio-political issues in the microfinance sector

The microfinance sector has witnessed various events over the years, including regulatory and legislative challenges that have resulted in disruption in operations. Some of these major events include Andhra crisis, demonetization in 2016, Covid-19 pandemic, and socio-political issues specific to certain states. These events have adversely affected the sector, leading to elevation in delinquencies and resulting in adverse impact on profitability and capital for the NBFC-MFIs. These challenges underscore the vulnerability of the microfinance business model to external risks. The COVID-19 pandemic in particular had introduced new challenges, aggravating existing vulnerabilities within the microfinance sector. It heightened credit risks and increased the likelihood of loan defaults among borrowers.

While the sector, on overall basis, has been able to manage all these major events, it continues to remain susceptible to events including local elections, natural calamities, and borrower protests among others, which may result in a momentary increase in delinquencies. In the case of IIFL Samasta, the ultimate credit loss for Samasta due to disruption after demonetization and Covid-19 pandemic was high. This indicates the fragility of the business model to external risks. MFIs will remain exposed to socially sensitive factors, including high interest rates, tighter regulations, and legislation.