Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA-/Positive’ rating to the perpetual bonds of IIFL Finance Limited (IIFL Finance; a part of the IIFL Finance group). CRISIL Ratings has also reaffirmed its ratings on other debt instruments and bank facilities of IIFL Finance at ‘CRISIL AA/CRISIL PPMLD AA/Positive/CRISIL A1+’.
The positive outlook reflects the strengthening market position of the IIFL Finance group and the expected sustained improvement in its profitability.
The ratings continue to be supported by the group’s comfortable capitalisation with improved gearing, and its diversified portfolio with majority contribution from inherently less risky asset classes. However, the group has a relatively less diversified resource mix and slightly higher cost of borrowings compared with some of its peers.
The IIFL Finance group’s assets under management (AUM) grew to Rs 77,444 crore as on December 31, 2023, from Rs 64,638 crore as on March 31, 2023 (Rs 51,210 crore as on March 31, 2022) driven by traction in the retail segment and its wide geographic presence. The group is in the top second entities in the gold finance segment and is among the top three non-bank players in microfinance. The housing finance business has also scaled up and the group – through its subsidiary IIFL Home – has carved a niche position for itself in this segment by delivering affordable housing finance. However, in relation to the overall market size, this portfolio remains small. The core retail segments — home, gold, microfinance, loans against property (LAP) and digital loans - remain in focus. As on December 31, 2023, retail loans formed around 96% of the AUM, while the remaining comprised loans to the commercial and real estate sectors and capital market financing.
The improvement in earnings is reflected in return on return on assets (RoA) and managed assets (RoMA) of 3.7% (annualised) and 2.5% (annualised), respectively, in the 9M of fiscal 2024 vis-à-vis 3.3% and 2.3%, respectively, in fiscal 2023 (2.7% and 2.1% in fiscal 2022). This has been backed by controlled credit costs and upfront income from direct assignment (DA) transactions, and its sustenance remains a monitorable.
The group has demonstrated ability to raise capital from long-term marquee investors, such as Fairfax and the CDC group. Furthermore, during the second quarter of fiscal 2023, IIFL Home Finance Ltd (IIFL Home) raised Rs 2,200 crore as primary equity from Abu Dhabi Investment Authority (ADIA), resulting in improved gearing. The adjusted gearing stood at 3.6 times (consolidated) as on December 31, 2023. The shift in business strategy towards an asset-light model, along with improving internal accrual, will continue to reinforce capitalisation as the group grows.
The group has limited diversity in resources and higher cost of borrowings compared with some of its peers. Banks and financial institutions (FIs) formed around 74% of its borrowings, while capital market lenders formed only 9%. Ability to diversify the funding profile at an optimal cost as the business scales up will be a key rating monitorable.
The rating on the perpetual bonds reflects the extent of buffer over the regulatory capital adequacy requirements. CRISIL Ratings believes that it 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 Finance Ltd (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 take into account 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 shift towards 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 raised Rs 2,200 crore 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 (3.9 times as on March 31, 2023, and 5.5 times as on March 31, 2022). Networth coverage for net non-performing assets (NPAs) was comfortable at 29 times as on December 31, 2023. Given the business strategy of growth with a shift towards asset-light model, capitalisation should remain comfortable over the medium term for the projected scale of operations.
On a standalone basis, IIFL Finance had a 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 were 12.5% and 19.6%, respectively. 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’s networth and gearing were Rs 1,904 crore and 4.5 times. Tier I and overall CAR on the same date were 18.5% and 24.2%, respectively.
Strengthening market position with diversified retail lending portfolio and extensive branch network 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). IIFL Finance provides loans across various retail asset classes. Its two lending subsidiaries, IIFL Home and IIFL Samasta, are in mortgage finance and microfinance businesses, respectively. The group is among the top two non-bank players in the gold finance segment and top three in microfinance segment. 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 (loans of 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 loan business, qualified under priority sector lending. The group has five key segments: home loans (33% of the AUM as on December 31, 2023), 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. These segments will continue to drive growth over the medium term. 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 reducing the book under these segments, which together accounted for only 5% of the AUM. Under CRE, the group finances the completion of projects already funded by it and is also looking at smaller ticket construction finance through IIFL home being synergistic to its core business of housing. In the capital market segment, the group finances retail clients of IIFL Securities Ltd. Growth is supported by a wide network of 4,681 branches as on December 31, 2023. The group leverages its distribution network to cross-sell financial products of other IIFL entities. It has made substantial investments in technology to leverage its geographical reach.
On a standalone level, IIFL Finance had 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 towards 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, and Rs 23,617 crore a year earlier), largely deployed as 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).
Improving profitability metrics 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, IIFL Finance’s gross NPAs (GNPAs) were 1.7% and 1.4%, respectively, as on December 31, 2023 and 1.8% and 1.6% as on March 31, 2023 (3.2% and 2.9% on March 31, 2022, respectively). The spike in GNPAs during March 2022 was due to the impact of the notification released by the Reserve Bank of India 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 maintain delinquency and manage credit cost will remain critical for sustaining healthy profitability. Also, focus on the partnership model and the expected scale up in the co-lending book should support profitability over the medium term.
Weakness: Limited diversity in resource profile; ability to diversify the borrowing base while reducing cost of funds is a monitorable As on December 31, 2023, banks and FIs constituted 72% of the group’s on-book borrowings — these were in the form of term loans (43%), refinance (18%), ECB (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, the share of capital market lenders (such as mutual funds, pension funds, trusts) was limited. IIFL Finance group has been able to tap public NCDs route however 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. Over the medium term, ability to diversify resource base at optimal cost will be a monitorable given the relatively higher reliance on banks and FIs for funding. [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.
Environment, social and governance (ESG) profile CRISIL Ratings believes that the IIFL Finance group’s ESG profile supports its credit risk profile. The ESG profile of financial institutions typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may 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, split into the chairman and CEO positions. It has extensive investor grievance redressal disclosures and mechanism 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. |
Outlook: Positive The IIFL Finance group will likely improve its earnings profile while scaling up operations and maintaining a diversified product mix. The group’s capitalisation is expected to remain comfortable. |
Rating Sensitivity Factors Upward factors
Downward factors
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About the Group 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 IIFL Finance 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. The remaining comprise capital market-based lending (margin funding and loans against shares) and construction and developer finance.
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. In 9M 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 against Rs 2,491 crore and Rs 745 crore, respectively, in the previous fiscal. In 9M 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. In 9M 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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