Rating Rationale
April 18, 2020 | Mumbai
IIFL Finance Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.2000 Crore
Long Term Rating^ CRISIL AA/Stable (Reaffirmed)
 
Long Term Principal Protected Market Linked Debentures Aggregating Rs.1500 Crore^ CRISIL PP-MLD AAr/Stable (Reaffirmed)
Subordinated Debt Aggregating Rs.498.37 Crore^ CRISIL AA/Stable (Reaffirmed)
Rs.5000 Crore Non Convertible Debentures*^ CRISIL AA/Stable (Reaffirmed)
 
Rs.325 Crore Non Convertible Debentures^ CRISIL AA/Stable (Reaffirmed)
Rs.8000 Crore Commercial Paper Programme (IPO Financing)^ CRISIL A1+ (Reaffirmed)
Rs.8000 Crore Commercial Paper^ CRISIL A1+ (Reaffirmed)
Rs.500 Crore Commercial Paper  CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
^Transferred from India Infoline Finance Ltd
*Interchangeable between secured and subordinated debt
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper of IIFL Finance Limited (IIFL Finance). CRISIL has also reaffirmed its 'CRISIL AA/CRISIL PP-MLD AAr/Stable/CRISIL A1+' rating on the debt instruments and bank facilities, respectively of India Infoline Finance Ltd (India Infoline Finance ; part of IIFL Finance group), which was transferred to IIFL Finance, post amalgamation
 
In January 2018, IIFL Finance Ltd announced plans to reorganise its corporate structure, and list the three entities - IIFL Finance (loans and mortgages business), IIFL Wealth (wealth and asset management business), and IIFL Securities (capital markets and other businesses).
 
In May 2019, as part of this restructuring scheme, IIFL Wealth and IIFL Securities were demerged from IIFL Finance and subsequently were listed in September 2019. In March 2020, India Infoline Finance was merged into IIFL Finance, the listed entity of the lending business.
 
The ratings continues to reflect the IIFL Finance group's diversified retail product offerings, the extensive branch network and adequate capitalisation. These rating strengths are partially offset by limited seasoning of the loan portfolio.
 
The nationwide lockdown (originally till April 14, 2020) declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have a near-term impact on disbursements and collections of financial institutions. The lockdown is now extended till May 3, 2020, and there is high likelihood that eventual lifting of restrictions will be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics of companies. Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.
 
On the liability side, the Reserve Bank of India (RBI) announced regulatory measures under 'Covid-19 - Regulatory Package'Â?, whereby lenders were permitted to grant moratorium on bank loans. The recent uncertainty on whether NBFCs are considered eligible for moratorium has resulted in some delay in decision-making by the lenders. In absence of moratorium on bank loans, the liquidity profile of a few NBFCs could come under pressure. CRISIL will continue to monitor the situation closely for all its rated companies.
 
IIFL Finance group entities have also approached all lenders to avail moratorium on their bank borrowings and the same has been granted by few of the lenders. On the asset side, the group has offered moratorium to its borrowers and hence, the collections are expected to be impacted till May 31, 2020.
 
Thereafter, most of the segments wherein the company operates - micro, small and medium enterprise (MSME) finance, home loans, gold loans and micro finance, could still witness challenges, especially in the cash salaried and self-employed segment, wherein income streams of borrowers is likely to be affected given the challenging macro environment. The group has so far witnessed collections during the lockdown period of around 55-60% in its home loans, ~60-65% in SME loans whereas collections in the gold loans and micro loans have been significantly lower. The group is taking steps to improve its collections by engaging and reaching out to the borrowers and is also planning to start some of operations from April 20, 2020.
 
IIFL Finance group, on a consolidated basis, has adequate current liquidity to manage this period wherein asset-side collections will be limited while liability-side outflows continue as per schedule. As on March 31, 2020, the company had a liquidity cushion of Rs 5,425 crore (Rs 1,209 crore of cash and equivalents, Rs 616 crore of liquid investments and Rs 3600 crore of unutilized committed bank lines including securitization lines). Against this, it has total debt repayment of Rs 2,360 crore over the three months through June 2020 and Rs 4,020 crore over the next six months through September 2020.
 
CRISIL will continue to closely monitor the collections of the group and its impact on the company's cashflows as well as asset quality. Ability of the group to access funds from diverse sources at a competitive rate will also remain a key monitorable.

Analytical Approach

For arriving at the ratings, CRISIL 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 has also factored in the business synergies that IIFL Finance group will have with IIFL Wealth and IIFL Securities, given their common promoters and the shared brand.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Diversified retail lending portfolio with an extensive branch network
IIFL Finance group, having consolidated assets under management (AUM) of Rs 36,015 crore as on December 31, 2019, is primarily engaged in secured lending across various retail asset classes. India Infoline Finance, the group's NBFC, has two subsidiaries - IIFL Home and Samasta, through which the mortgage finance and micro finance businesses are carried out.
 
Retail loans account for almost 87% of the AUM as on December 31, 2019, with a high level of granularity (loans with ticket size below Rs 1 crore). Also, over 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. It also operates in two synergistic segments - construction & developer funding and capital market lending. While incremental developer funding will be done on a selective basis to support the home loan business, capital market lending will largely focus on retail clients of IIFL Securities. These four segments form around 86% of the AUM as on December 31, 2019, up from 61% as on March 31, 2016. Further, 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, 2019, the IIFL Finance group had a wide network of 2,366 branches spread across 25 states. The group has also made significant investment in technology to effectively benefit from this geographical reach. Going forward, the group plans to leverage business synergies with other IIFL entities for cross-selling of financial products (insurance, mutual funds etc) and other retail loan products, given the already established branch and distribution platform.
 
On a standalone level, India Infoline Finance (now merged with IIFL Finance) had an AUM of Rs 14,469 as on December 31, 2019 (Rs 14,460 crore as on March 31, 2019) primarily towards gold loans (52%), business loans (20%) and developer and construction finance (24%).
 
IIFL Home had an AUM of Rs 18,573 crore as on December 31, 2019 (Rs 18,158 crore as on March 31, 2019) largely toward home loans (~67%), followed by LAP (~27%) and construction finance (~6%).
 
Samasta had an AUM of Rs 2,973 crore as on December 31, 2019 (Rs 2,285 crore as on March 31, 2019).
 
* Adequate capitalisation
The IIFL Finance group is adequately capitalised, with networth, Tier-I, and overall capital adequacy ratio (CAR) of around Rs 4,816 crore, 17.9%, and 21.4%, respectively, as on December 31, 2019 (Rs 4,368 crore, 16.0% and 19.2%, respectively, as on March 31, 2019). Networth coverage for net NPAs was comfortable at around 19 times as on December 31, 2019 (25 times as on March 31, 2019). On-book gearing as on same date was adequate at around 4.5 times; however, CRISIL'adjusted gearing (on-book borrowings + securitization/assignment) was higher at around 7.3 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). Given the modest growth plans, capitalisation remains 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, 2019, India Infoline Finance (standalone; now merged with IIFL Finance) had a Tier-I CAR and overall CAR of 17.9% and 21.4%, respectively. Its reported net worth and CRISIL- adjusted gearing stood at Rs 3639 crore and 4.0  times as on same date. Net worth coverage for net NPAs was around 32 times as on December 31, 2019.
 
IIFL Home had a reported net worth and CRISIL ' adjusted gearing of Rs 1,806 crore and 9.8 times, respectively, as on December 31, 2019. Its Tier-I and overall CAR stood at 18.1% and 23.0%, respectively, as on same date. The company's net worth coverage for net NPAs was around 13 times as on December 31, 2019.
 
Samasta's Tier-I and overall CAR stood at 20.9% and 27.8%, respectively, as on December 31, 2019. Reported net worth and CRISIL-adjusted gearing stood at Rs 411 crore and 6.5 times, respectively, as on same date.
 
Weakness:
* Limited seasoning of some of the asset classes like home loans and MSME loans
The IIFL Finance group's loan portfolio (excluding CV finance) has recorded a three-year compound annual growth rate of around 27%. Given the high growth 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 relatively recent addition to the product suite. Overall gross NPAs and net NPAs stood at 2.27% and 0.98%, respectively, as on December 31, 2019 ( 1.96% and  0.63%, respectively, as on March 31, 2019). 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 saw a spike in fiscal 2019, with reported gross NPAs inching up to 4.4% as on March 31, 2019, from 2.4% a year ago. However, the share of wholesale lending is relatively low at about 13% of the overall AUM as on December 31, 2019. Also, gross NPAs in the segment have come down to 3.8% as on December 31, 2019.
 
However, given the evolving liquidity situation for non-banks since fiscal 2018, coupled with recent events, asset quality on exposures such as developer loans and large ticket loans against property would be a key monitorable for all lenders, including IIFL Finance. Borrowers of such loan categories are more sensitive to an environment of prolonged liquidity tightness. RBIs measure on extension of DCCO for commercial real estate projects should provide some respite.  
 
Any sharp deterioration in asset quality, specifically in the wholesale lending book, will also impact profitability and capital, and remains a key rating monitorable.
 
While retail asset quality has remained under control in the past, there could be increase in gross NPAs from current levels across segments due to the vulnerability of the key retail segments of the company to economic slowdown and Covid-19. The lockdown has affected the income generation ability and saving of borrowers, especially of the self-employed and micro finance borrower, who typically have a weaker credit profile. In this context, credit costs are expected to increase in the near term.
 
Gross NPA of India Infoline Finance (standalone; now merged with IIFL Finance), IIFL Home and Samasta stood at 3.3%, 1.5% and 1.3%, respectively, as on December 31, 2019 (3.37%, 0.88% and 0.37%, respectively, as on March 31, 2019).
Liquidity Strong

The asset liability maturity (ALM) profile of IIFL Finance shows that liquidity position, on a consolidated basis, is strong, with positive cumulative mismatches in most of the buckets up to one year as of December 2019. The housing finance business, however, has mismatches, given the relatively long tenure of its assets, vis-a-vis its borrowings. The mismatches are, nevertheless, efficiently managed, through unutilised bank lines.
 
As on March 31, 2020, the company had liquidity of Rs 1,825 crore in cash and bank balance including liquid investments and Rs 3,600 crore of unutilized committed lines (including securitisation lines). Against this, it has total debt repayment of Rs 2,342 crore over the three months through June 2020 and Rs 3,821 crore over the next six months through September 2020.
 
The group has raised Rs 22,407 crores between April 2019 and March 2020, via NCDs (including retail issuances), bank funding, external commercial borrowings and securitisation. The group has reduced its dependence on commercial paper (CP) borrowing, which has reduced to nil as on December 31, 2019 from 24% as on September 30, 2018.
 
Of the incremental funding raised, the proportion of bank funding and NCDs has been on an increasing trend. In the last two quarters of fiscal 2020, the company raised long term funds of Rs 7,275 crores (of which Rs 4,554 crores was raised in the quarter ended March 31, 2020) through bank funding and NCDs including public retail bond issuances and external commercial borrowings

Outlook: Stable

CRISIL believes the IIFL Finance group will continue to benefit from its diversified product offerings and adequate capitalisation.
 
Rating Sensitivity Factors
Upward Factors:
* Significant improvement in market position while improving asset quality
* Improvement in profitability, with return on managed assets (RoMA) beyond 3.0% on a sustained basis
 
Downward Factors:
* Deterioration in the asset quality, with GNPA increasing to above 5% over an extended period, thereby impacting profitability
* Further drop in collections metrics
* Weakening of capitalisation metrics with higher than expected adjusted gearing on a sustained basis
* Continued funding access challenges for non-banking sector with limited fund-raising by IIFL Finance Group and reduction in liquidity levels

About IIFL Finance
IIFL Finance is the listed holding company of the IIFL Finance group and is registered as a systemically important non-deposit taking non-banking finance company (NBFC). The group offers various retail lending products, including gold loans, home loans, LAP, business loans, micro finance and capital market based lending (margin funding and loan against shares).  It also offers construction and developer finance.
 
In fiscal 2008, IIFL Finance (erstwhile IIFL Holding Ltd) had launched its retail finance business through the NBFC, Moneyline Credit Ltd, which was later merged with India Infoline Finance, with effect from April 2011. In fiscal 2009, India Infoline Housing Finance Ltd received a registration as a housing finance company from the National Housing Bank and was subsequently renamed as IIFL Home Finance. In fiscal 2017, IIFL Finance ventured into microfinance segment after acquisition of micro lender Samasta Microfinance. As of December 31, 2019, promoters hold 29.4% stake in IIFL Finance and 35.4% is held by Prem Watsa controlled Fairfax Holdings.
 
CRISIL has also analysed the standalone financials of India Infoline Finance (now merged with IIFL Finance). The company reported a total income (net of interest expenses) and profit after tax (PAT) of Rs 1,518 crore and Rs 384 crore, respectively, in fiscal 2019, against Rs 1,238 crore and Rs 227 crore, respectively, in the previous fiscal. The company had networth and total assets of Rs 3,501 crore and Rs 17,719 crore, respectively, as on March 31, 2019.  For the nine months ended December 31, 2019, the company reported a total income (net of interest expenses) and PAT stood of Rs 140 crore and Rs 946 crore as against a total income (net of interest) and PAT of Rs 234 crore and Rs 1,047 crore in the corresponding period of the previous fiscal. The company had net worth and total assets of Rs 3639 crore and Rs 16,775 crore, respectively, as on December 31, 2019. 
 
IIFL Finance (consolidated) had total income (net of interest expenses) and PAT of Rs 2,500 crore and Rs 804 crore, respectively, in fiscal 2019. For the nine months ended December 31, 2019, the total income (net of interest expenses) was Rs 1703 crore and PAT of Rs 444 crore, against Rs 1687 crore and Rs 490 crore, respectively, for the corresponding period of the previous fiscal. Excluding the one-time expense on account of reversal of deferred tax, PAT stood at Rs 543 crore for the period ended December 31, 2019.

Key Financial Indicators - consolidated; CRISIL adjusted numbers
As on / for the period ended   December  2019 December 2018
Total Assets Rs crore 31,259 32,158
Total income (net of interest expenses) Rs crore 1,703 1,687
Profit after tax^ Rs crore 444 490
Gross NPA % 2.27% 3.74%
Return on managed assets (annualized)^ % 1.4% 1.5%
Gearing Times 4.5 5.9
Adjusted gearing Times 7.3 8.2
Excluding the one-time expense, PAT and RoMA stood at Rs 543 crore and 1.8%, for the period ended December 2019
 
Key Financial Indicators - standalone; CRISIL adjusted numbers
As on / for the period ended   December 2019 December 2018
Total income (net of interest expenses) Rs crore 946 1,047
Profit after tax Rs crore 140 234
Gross NPA % 3.3% 6.6%
Gearing Times  3.2 3.8
Adjusted gearing Times  4.0 4.8

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  1.4% (annualized) for the nine months ended December 31, 2019, excluding the one-time expense on account of reversal of deferred tax, RoMA stood at 1.8% for the above period (around  1.8%  for fiscal 2019; this included the one-time gain on sale of CV business). 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, while credit costs have remained under control, the ability of the company to manage asset quality specifically in the wholesale book, 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)
ISIN Name of Instrument Date of
Allotment
Coupon
Rate (%)
Maturity
Date
Issue Size
(Rs Crore)
Rating Outstanding
with Outlook
NA Commercial Paper Programme
(IPO Financing)^
NA NA 7-30 days 8000 CRISIL A1+
NA Commercial paper^ NA NA 7-365 days 8000 CRISIL A1+
NA Commercial paper NA NA 7-365 days 500 CRISIL A1+
INE866I07BY4 Debentures#^ 07-Feb-19 9.50% 07-May-22 261 CRISIL AA/Stable
INE866I07BZ1 Debentures#^ 07-Feb-19 9.60% 07-May-22 39 CRISIL AA/Stable
INE866I07CB0 Debentures#^ 07-Feb-19 9.60% 07-May-22 49 CRISIL AA/Stable
INE866I07CD6 Debentures#^ 07-Feb-19 9.75% 07-Feb-24 637 CRISIL AA/Stable
INE866I07CF1 Debentures#^ 07-Feb-19 10.20% 07-Feb-24 126 CRISIL AA/Stable
INE866I08279 Debentures#^ 07-Feb-19 10.00% 07-Feb-29 31 CRISIL AA/Stable
INE866I08295 Debentures#^ 07-Feb-19 10.50% 07-Feb-29 15 CRISIL AA/Stable
INE866I07CJ3 Debentures#^ 06-Sep-19 10.00% 06-Dec-20 98 CRISIL AA/Stable
INE866I07CK1 Debentures#^ 06-Sep-19 9.50% 06-Dec-22 37 CRISIL AA/Stable
INE866I07CL9 Debentures#^ 06-Sep-19 9.85% 06-Dec-22 12 CRISIL AA/Stable
INE866I07CM7 Debentures#^ 06-Sep-19 9.85% 06-Dec-22 65 CRISIL AA/Stable
INE866I08303 Debentures#^ 06-Sep-19 10.00% 06-Jun-25 26 CRISIL AA/Stable
INE866I08311 Debentures#^ 06-Sep-19 10.50% 06-Jun-25 6 CRISIL AA/Stable
NA Debentures**#^ NA NA NA 3598 CRISIL AA/Stable
NA Debentures**^ NA NA NA 325 CRISIL AA/Stable
NA Subordinated Bond**^ NA NA NA 300.37 CRISIL AA/Stable
INE866I08121 Subordinated Bond^ 31-Aug-12 12.15% 30-Aug-22 5 CRISIL AA/Stable
INE866I08121 Subordinated Bond^ 31-Aug-12 12.15% 31-Aug-22 15 CRISIL AA/Stable
INE866I08162 Subordinated Bond^ 05-Nov-12 12.20% 04-Nov-22 23 CRISIL AA/Stable
INE866I07CN5 Subordinated Bond^ 11-Sep-19 9.75% 09-Oct-20 150 CRISIL AA/Stable
INE866I07CO3 Subordinated Bond^ 17-Sep-19 9.85% 17-Jan-23 5 CRISIL AA/Stable
INE866I07CH7 Long Term Principal Protected
Market Linked Debentures^
26-Jun-19 NA 27-Sep-21 57 CRISIL PP-MLD AAr/Stable
INE866I07CI5 Long Term Principal Protected
Market Linked Debentures^
26-Jun-19 NA 27-Sep-22 25 CRISIL PP-MLD AAr/Stable
INE866I07CH7 Long Term Principal Protected
Market Linked Debentures^
17-Jul-19 NA 27-Sep-21 50 CRISIL PP-MLD AAr/Stable
NA Long Term Principal Protected
Market Linked Debentures**^
NA NA NA 1368 CRISIL PP-MLD AAr/Stable
NA Proposed Long Term Bank
Loan Facility^
NA NA NA 2000 CRISIL AA/Stable
^Transferred from India Infoline Limited
**not yet issued
# Interchangeable between secured and subordinated debt
 
Annexure - List of entities consolidated
Entity Consolidated Rationale for Consolidation
IIFL Home Finance Limited Subsidiary
Samasta Micro Finance Limited Subsidiary
Clara Developers Private Limited Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  8500.00  CRISIL A1+      20-08-19  CRISIL A1+  04-09-18  CRISIL A1+    --  -- 
Commercial Paper Programme(IPO Financing)  ST  8000.00  CRISIL A1+    --    --    --    --  -- 
Long Term Principal Protected Market Linked Debentures  LT  132.00
18-04-20 
CRISIL PP-MLD AAr/Stable    --    --    --    --  -- 
Non Convertible Debentures  LT  1402.00
18-04-20 
CRISIL AA/Stable    --    --    --    --  -- 
Short Term Debt (Including Commercial Paper)  ST              13-08-18  CRISIL A1+  29-09-17  CRISIL A1+  -- 
                10-05-18  CRISIL A1+       
                09-02-18  CRISIL A1+       
Subordinated Debt  LT  198.00
18-04-20 
CRISIL AA/Stable    --    --    --    --  -- 
Fund-based Bank Facilities  LT/ST  2000.00  CRISIL AA/Stable    --    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Finance Companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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