Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to Rs 6,398 crore non-convertible debentures and enhanced bank facilities of Rs 4,000 crore. CRISIL Ratings has also reaffirmed its ‘CRISIL AA/CRISIL PP-MLD AAr/Stable/CRISIL A1+’ ratings on the debt instruments and bank facilities of IIFL Finance Ltd (IIFL Finance; part of the IIFL Finance group).

 

Also, CRISIL Ratings has withdrawn its ratings on the Rs 6,111.66 crore non-convertible debentures (NCDs), Rs 300.37 crore subordinated debt, Rs 375 crore long-term principal protected market-linked debentures and Rs 7,500 crore commercial paper programme (IPO financing), as there is no outstanding amount against the rated instruments. This is in line with the withdrawal policy of CRISIL Ratings.

 

The ratings continue to reflect the diversified retail product offerings of the IIFL Finance group, with a large part of the portfolio having inherently less risky asset classes, an extensive branch network and adequate capitalisation. These strengths are partially offset by average, albeit improving, profitability.

 

Assets under management (AUM) grew to Rs 51,210 crore (15% growth year-on-year) as on March 31, 2022, driven by the retail segment and supported by a wide geographic presence. The four core segments identified-home, gold, business and microfinance loans-remain the focus area. Retail loans formed around 93% of the AUM, while the remaining were loans to the commercial and real estate sector and capital market financing. The group has also demonstrated its ability to raise capital from long-term marquee investors, such as Fairfax and the CDC group. Additionally, IIFL Home Finance Ltd (IIFL Home) has announced capital infusion of Rs 2,200 crore from Abu Dhabi Investment Authority (ADIA).

 

Lockdowns amid the Covid-10 pandemic disrupted economic activity and exerted pressure on the cash flow of borrowers. Consequently, collections dropped in the first as well as second waves but recovered gradually owing to subsequent easing of movement restrictions. Collection efficiency[1] was 106% as of March 2022, while on a segmental basis, it was 100% for home loans, 96% for business loans, 105% for micro-finance and 145% for gold loans. Though the third wave of the pandemic has not disrupted the operations materially, any change in the payment discipline of the borrowers may affect delinquency levels and will remain a monitorable.

 

Under the Reserve Bank of India (RBI) Resolution Framework 1.0 and 2.0 for Covid-19-related stress, the company had a restructured portfolio of around 0.7% of the AUM as on March 31, 2022. Gross non-performing assets (GNPAs/loans) inched up to 3.2% as on March 31, 2022, from 2.1% as on March 31, 2021, largely on account of the impact from the notification released by the RBI on November 12, 2021, and on account of the pandemic to some extent. Ability to manage collections and asset quality will be a key monitorable.

[1] Including arrears but excluding prepayments

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 these entities, collectively referred to as the IIFL Finance group, have significant operational, financial and managerial integration and operate under a common brand. Furthermore, CRISIL Ratings has factored in the business synergies that the group will have with IIFL Wealth Management Ltd and IIFL Securities Ltd given their common promoters and 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 and an extensive branch network

Consolidated AUM stood at Rs 51,210 crore as on March 31, 2022 (Rs 44,688 crore a year earlier). IIFL Finance is primarily engaged in lending across various retail asset classes. Its two lending subsidiaries, IIFL Home and IIFL Samasta, carry out the mortgage finance and microfinance businesses, respectively.

 

Retail loans accounted for 93% of the AUM as on March 31, 2022, and had high granularity (loans of less than Rs 1 crore). Also, 69% of the portfolio, excluding gold loan business qualified under priority sector lending as on March 31, 2022. The company has four key segments: home loans (35% of the AUM as on March 31, 2022), gold loans (32%), business loans[1] (15%) and microfinance (12%), which together accounted for 93% 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 company has been consciously reducing the book under these segments, which together accounted for only 7% as on March 31, 2022. Under CRE, the company continues to finance the completion of projects that were already funded by it and construction finance, while the capital market segment finances the retail clients of IIFL Securities Ltd. Growth is also supported by a wide network of 3,296 branches as of March 2022, spread across 1260 towns/cities. The company 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 21,109 crore as on March 31, 2022 (Rs 19,199 crore a year earlier), primarily towards gold loans (77%), business loans (9%), developer and construction finance (11%) and capital markets (3%). IIFL Home had AUM of Rs 23,617 crore as on March 31, 2022 (Rs 20,694 crore a year earlier), largely toward home loans (75%), followed by loans against property (LAP; 23%) and construction finance (2%). IIFL Samasta had AUM of Rs 6,484 crore as on March 31, 2022 (Rs 4,796 crore as on March 31, 2021).

 

Adequate capitalisation

Consolidated networth was around Rs 6,470 crore as on March 31, 2022 (Rs 5,393 crore as on March 31, 2021), with on-book gearing of 5.5 times; however, CRISIL Ratings-adjusted gearing (on-book borrowings + securitisation/assignment) was higher at 8.2 times. Networth coverage for net non-performing assets (NPAs) was comfortable at 10 times as on March 31, 2022 (16 times a year earlier). The group has demonstrated an ability to raise capital from long-term marquee investors, such as Fairfax and the CDC group. Also, IIFL Home recently announced raising of Rs 2,200 crore from ADIA. Given the growth plans and business strategy, capitalisation should remain adequate for the current and medium-term projected scale of operations. The ability to raise capital regularly and manage leverage levels will continue to be a monitorable.

 

As on March 31, 2022, IIFL Finance, on a standalone basis, had networth and CRISIL Ratings-adjusted gearing of Rs 4,427 crore and 5.6 times, respectively. Tier-I capital adequacy ratio (CAR) and overall CAR was 16.0% and 23.9%, respectively. Networth coverage for net NPAs was around 21 times. IIFL Home reported networth and CRISIL Ratings-adjusted gearing of Rs 2,681 crore and 8.3 times, respectively. Tier-I and overall CAR stood at 21.1% and 30.5%, respectively. Networth coverage for net NPAs was around 8 times. IIFL Samasta reported adjusted networth and CRISIL Ratings-adjusted gearing of Rs 964 crore and 5.5 times, respectively. Tier-I and overall CAR were 15.9% and 17.8%, respectively.

 

Weakness

Average, albeit improving, profitability

While CRISIL Ratings-adjusted return on managed assets (RoMA; adjusted for upfront income from direct assignment [DA]) improved to 1.4% for fiscal 2022 from 1.3% in fiscal 2021 (0.9% in 2020), it remains modest. Including income from DA, RoMA stood at 2.1% for fiscal 2022 (1.6% for fiscal 2021). On an absolute basis, IIFL Finance (consolidated) reported net profit of Rs 1,188 crore in fiscal 2022, up from Rs 761 crore in the previous fiscal and Rs 503 crore in fiscal 2020. Earnings were supported by lower credit cost and higher upfront income from DA transactions. Credit cost (provisions and write-offs/average managed assets) was 1.5% in fiscal 2022 compared with 2.4% in fiscal 2021. Elevated credit cost was mainly on account of Covid-19, which led to an increase in the delinquency levels. The company is increasingly looking at the partnership model, and co-lending is expected to contribute to improving profitability as this book materially scales up over the medium term.

 

On consolidated and standalone basis, IIFL Finance’s GNPAs inched up to 3.2% and 2.9% respectively as on March 31, 2022, from 2.1% and 2.4% respectively as on March 31, 2021. This includes the impact of the notification released by the RBI on November 12, 2021 and excluding the same, GNPAs on a consolidated basis would stand at 2.3%.

 

On a standalone basis, IIFL Home and IIFL Samasta reported GNPAs (excluding impact of Nov'12 circular) of 2.1% and 3.1% respectively as on March 31, 2022 (2.0% and 1.8%, respectively, as on March 31, 2021). GNPAs for the home loan segment stood at 2.6%, gold loan at 0.9%, business loans at 6.0% and microfinance at 3.9%. Apart from this, the IIFL Finance group’s restructured book stood at 0.7% of the AUM as on March 31, 2022. Ability to maintain delinquency levels and manage credit cost continues to be a key monitorable.

[1] Business loans include LAP and unsecured loans to micro small and medium enterprises

Liquidity : Strong

As on May 31, 2022, the company had a liquidity cushion of Rs 3,384 crore (Rs 1,029 crore of cash and equivalents, Rs 1,438 crore of unutilised cash credit limit and Rs 917 crore of unutilised bank limit, including securitisation/DA limit). Against this, total debt obligation was Rs 2,203 crore over the four months through September 2022.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes that 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.

 

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 4,207 incandescent lights with light-emitting diode (LED) panels across 15 branches.

 

Processes have been digitalised and automated to provide a completely paperless journey to customers. As a result, IIFL Home was able to reduce paper consumption by 3.9 tonne in fiscal 2021 (approximately 0.78 million sheets of paper).

 

Women comprised 18% of the total employees as on December 31, 2021. One out of nine board members is a woman.

 

Of the company’s board members, 67% 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 IIFL Finance 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 markets.

Outlook Stable

IIFL Finance group will maintain adequate capitalisation and diversified product offerings in the retail segment.

Rating Sensitivity factors

Upward factors

• Significant improvement in the market position and better asset quality

• Improvement in profitability, with RoMA beyond 3.0% on a sustained basis

 

Downward factors

• Weakening of the asset quality, with GNPAs increasing to above 5% over an extended period, thereby impacting profitability

• Weakening of the capitalisation metrics, with a sustained higher-than-expected gearing

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 and  microfinance loans which are the core segments and form 93% of the AUM while the rest comprises of capital market-based lending (margin funding and loans against shares) and construction and developer finance. As of March 2022, promoters held 24.9% stake in IIFL Finance, while 22.3% is held by Mr Prem Watsa-owned Fairfax Holdings and 7.8% by CDC Group PLC.

 

On a consolidated basis, IIFL Finance had total income (net of interest expenses) and profit after tax (PAT) of Rs 4,015 crore and Rs 1,188 crore, respectively, in fiscal 2022 against Rs 3,364 crore and Rs 761 crore, respectively, in the previous fiscal.

 

On a standalone alone basis, IIFL Finance reported total income (net of interest expenses) and PAT of Rs 2,474 crore and Rs 745 crore, respectively, in fiscal 2022 against Rs 1,881 crore and Rs 343 crore, respectively, in the previous fiscal. On a standalone alone basis, IIFL Home reported total income (net of interest expenses) and PAT of Rs 1,159 crore and Rs 578 crore, respectively, in fiscal 2022 against Rs 1,014 crore and Rs 401 crore, respectively, in the previous fiscal.

Any other information: Not applicable