Rating Rationale
August 20, 2019 | Mumbai
IIFL Finance Limited
Rating Reaffirmed 
 
Rating Action
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of IIFL Finance Limited (IIFL Finance; part of IIFL Finance group).
 
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.
 
Further, given the challenges in funding access for non-banks, CRISIL will continue to monitor the ability of the group to access funds from diverse sources at a competitive rate.
 
In January 2018, IIFL Finance (earlier IIFL Holdings 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. Currently, IIFL Finance, the listed non-operating holding company for the lending businesses, holds a 100% stake in India Infoline Finance. However, as part of the restructuring scheme, India Infoline Finance will be merged into IIFL Finance in the near to medium term.

Analytical Approach

For arriving at the ratings, CRISIL has consolidated the business and financial risk profiles of IIFL Finance and its subsidiaries, including India Infoline Finance, 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 - List of entities consolidated, 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 34,920 crore as on June 30, 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 85% of the AUM as on June 30, 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 85% of the AUM as on June 30, 2019, up from 55% 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 June 30, 2019, the IIFL Finance group had a wide network of 2,110 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 had an AUM of Rs 13,574 as on June 30, 2019 (Rs 14,460 crore as on March 31, 2019) primarily towards gold loans (48%), MSME loans (24%) and construction finance to developers (25%). During the quarter ended June 30, 2019, the company transferred the mortgage business (AUM of around Rs 966 crore) on a slump sale basis to IIFL Home.
 
IIFL Home had an AUM of Rs 18,988 crore as on June 30, 2019 (Rs 18,158 crore as on March 31, 2019) largely toward home loans (~65%), followed by LAP (~29%) and construction finance (~6%).
 
Samasta had an AUM of Rs 2,358 crore as on June 30, 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 4,549 crore, 18.4%, and 22.1%, respectively, as on June 30, 2019 (Rs 4,317 crore, 16.0% and 19.2%, respectively, as on March 31, 2019). Networth coverage for net NPAs was comfortable at around 23 times as on June 30, 2019. On-book gearing as on same date was adequate at around 5.3 times; however, CRISIL - adjusted gearing (on-book borrowings + securitization/assignment) was higher at around 7.4 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 June 30, 2019, India Infoline Finance (standalone) had an overall and Tier-I CAR of 22.1% and 18.4%, respectively. Its reported net worth and CRISIL- adjusted gearing stood at Rs 3,587 crore and 3.9 times as on same date. Net worth coverage for net NPAs was around 50 times as on June 30, 2019.
 
IIFL Home had a reported net worth and CRISIL - adjusted gearing of Rs 1,665 crore and 10.3 times, respectively, as on June 30, 2019. Its Tier-I and overall CAR stood at 16.6% and 21.2%, respectively, as on same date. The company's net worth coverage for net NPAs was around 12 times as on June 30, 2019.
 
Samasta's Tier-I and overall CAR stood at 22.4% and 16.04%, respectively, as on June 30, 2019. Reported net worth and CRISIL-adjusted gearing stood at Rs 292 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 2.00% and 0.78%, respectively, as on June 30, 2019 (1.95% and 0.62%, 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 14% of the overall AUM as on June 30, 2019. Also, gross NPAs in the segment have come down 2.9% as on June 30, 2019.
 
However, given the evolving liquidity situation for non-banks since September 2018, 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. Any sharp deterioration in asset quality, specifically in the wholesale lending book, will also impact profitability and capital, and remains a key rating monitorable.
 
Gross NPA of India Infoline Finance (standalone), IIFL Home and Samasta stood at 3.01%, 1.36% and 0.78%, respectively, as on June 30, 2019 (3.37%, 0.88% and 0.37%, respectively, as on March 31, 2019).
Liquidity

The asset liability maturity (ALM) profile of IIFL Finance shows that liquidity position, on a consolidated basis, is adequate, with positive cumulative mismatches in most of the buckets up to one year as of June 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 June 30, 2019, against the total debt maturing of Rs 3,249 crore (of which commercial paper repayment is Rs 1,790 crore) till September 30, 2019, the group had investments of Rs 1,276  crore in mutual funds and other liquid investments, and unutilised bank lines (including securitization lines) of Rs 1,949 crore.
 
The group has raised around Rs 19,310 crore since September 2018, via NCDs (including retail issuances), bank funding and securitisation. Incremental fund raising in the first quarter of fiscal 2020 was primarily through securitisation. The group has also raised long-term funds via public retail bond issuances in January 2019 and August 2019.
 
About IIFL Finance
IIFL Finance is a listed non-operating holding company of the IIFL Finance group. 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 June 30, 2019, promoters hold 29% stake in IIFL Finance and 35% is held by Prem Watsa controlled Fairfax Holdings.
 
IIFL Finance (consolidated) had total income (net of interest expenses) and PAT of Rs 2,500 crore and Rs 794 crore, respectively, in fiscal 2019. For the quarter ended June 30, 2019, the PAT was Rs 180 crore on total income (net of interest expense) of Rs 594 crore, against Rs 195 crore and Rs 562 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators - IIFL Finance (consolidated; CRISIL adjusted numbers)
As on / for the period ended   Jun-19 Jun-18
Total Assets Rs crore 30,861 32,971
Total income (net of interest expenses) Rs crore 594 562
Profit after tax Rs crore 180 195
Gross NPA % 2.0% 2.0%
Return on managed assets (annualized) % 1.8% 2.2%
Gearing Times 5.3 7.1
Adjusted gearing Times 7.4 8.1

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 1.8% (annualized) for the quarter ended June 30, 2019 (around 2.2% 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)		 Outstanding rating
with Outlook
NA Commercial Paper NA NA 7 to 365 days 500 CRISIL A1+
 
Annexure - List of entities consolidated
Entity Consolidated Extent of Consolidation Rationale for Consolidation
India Infoline Finance Limited Full Subsidiary
IIFL Home Finance Limited Full Subsidiary
Samasta Micro Finance Limited Full Subsidiary
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+      04-09-18  CRISIL A1+    --    --  -- 
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+           
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

For further information contact:
Media Relations
 Analytical Contacts
 Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

Vinay Rajani
Media Relations
CRISIL Limited
D: +91 22 3342 1835
M: +91 91 676 42913
B: +91 22 3342 3000
vinay.rajani@ext-crisil.com

 Krishnan Sitaraman
Senior Director - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 8070
krishnan.sitaraman@crisil.com

Subhasri Narayanan
Director - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 3403
subhasri.narayanan@crisil.com

Jitin Vohra
Rating Analyst - CRISIL Ratings
CRISIL Limited
D::+91 22 3342 3894
Jitin.Vohra@crisil.com 		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is a leading agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 1,00,000 customers.
 
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
 
For more information, visit www.crisil.com 

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.

CRISIL PRIVACY
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.CRISIL or its associates may have other commercial transactions with the company/entity.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL