Detailed Rationale CRISIL Ratings has removed its long-term rating on the debt instrument and bank facilities of IIFL Finance Limited (IIFL Finance) from ‘Rating Watch with Developing Implications’ and has reaffirmed the rating at ‘CRISIL AA/CRISIL AA-/CRISIL PPMLD AA’ while assigning a ‘Stable’ outlook. The short-term rating has been reaffirmed at ‘CRISIL A1+’.
The rating action follows lifting of the regulatory embargo on the gold loan business of IIFL Finance, disclosed by the company vide the announcement dated September 19, 2024, thereby allowing the group to resume sanctions and disbursements in this segment as in the normal course of business, as well securitization/assignment/sale of loans. The company has demonstrated track record of profitably scaling its gold loan business – which remains one of its core segments. With the regulatory restriction being removed, and the company having taken requisite corrective measures following the action by the Reserve Bank of India (RBI), the group is expected to focus on regaining its market share in the gold loan business which should support restoration of its market position and profitability, which had moderated during the embargo. The time taken to attain its pre-embargo level of growth and profitability, while ensuring full adherence to compliances and regulations, remains monitorable.
CRISIL Ratings has also withdrawn its rating on long term principal protected market linked debentures of Rs.100 crore (See ‘Annexure - Details of Rating Withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.
The embargo imposed by RBI on March 04, 2024, had ordered IIFL Finance to cease and desist from sanctioning and disbursing gold loans or assigning/securitising/selling any of its gold loans. However, the RBI allowed the company to continue servicing its existing gold loan portfolio, through usual collection and recovery processes. Subsequently, an RBI instituted special audit was conducted wherein all the corrective measures and compliances implemented by IIFL Finance were reviewed. Basis the findings of this inspection, a detailed audit report and a compliance certificate submitted by the audit committee of the company. This was followed by a regulatory inspection which was recently concluded. With all of the above, the embargo was finally lifted on September 19, 2024.
During the restriction period, gold loan portfolio reduced to around Rs 14,727 crore over June 2024 (from Rs 23,354 crore in March 2024) due to the organic run down. Other key businesses of the group viz, home loans, microfinance, loan against property and others, were not directly impacted by this RBI directive. All the corrective measures on operational processes and compliances, highlighted by RBI have been implemented and the company’s ability to revive the momentum of growth in the gold loan business, will continue to be monitored.
The ratings continue to be supported by the group’s comfortable capitalisation, its established track record of operations in home loans and microfinance segments, and sustained profitability metrics, supported by stable asset quality. These strengths are partly offset by limited diversity in the resource profile, with moderately higher cost of funds vis-à-vis some of the peers.
Consolidated AUM stood at Rs 69,610 crore as on June 30, 2024, with gold loans accounting for 21%. Housing finance and microfinance, which form 40% and 17%, respectively, are carried out via subsidiaries, IIFL Home Finance Ltd (IIFL Home) and IIFL Samasta Finance Ltd (IIFL Samasta). In terms of the earnings profile, the group reported return on assets (RoA) and managed assets (RoMA) of 3.4% and 2.3%, respectively, for fiscal 2024, vis-à-vis 3.3% and 2.3%, respectively, in fiscal 2023 and 2.7% and 2.1%, respectively, in fiscal 2022. This was underpinned by controlled credit cost and upfront income from direct assignment (DA) transactions, and its sustenance considering any potential changes in the business model following the restrictions. RoA and RoMA, on an annualized basis, were 2.2% and 1.6%, respectively, for first quarter of fiscal 2025. Earnings were impacted due to lower net interest margins (NIMs) and increase in operating expenses in the quarter, remains a monitorable. The group has demonstrated ability to raise capital from long-term marquee investors, such as Fairfax, the CDC group and Abu Dhabi Investment Authority (ADIA). However, the resource profile is marked by limited diversity and higher cost of borrowings, compared with peers. |
Analytical Approach CRISIL Ratings has consolidated the business and financial risk profiles of IIFL Finance and its subsidiaries, including IIFL Home and 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.
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:
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 has also raised Rs 2,200 crore as primary equity from ADIA in the second quarter of fiscal 2023. Consequently, consolidated networth improved to Rs 12,056 crore as on March 31, 2024 (Rs 10,202 crore as on March 31, 2023) and adjusted gearing to 3.9 times (as against 3.9 times). Further, IIFL Finance raised Rs 1,272 crore via rights issue in May 2024 and consolidated networth stood at Rs 13,701 crore as on June 30, 2024 with adjusted gearing stood at 3.1 times as on June 30, 2024. Networth coverage for net non-performing assets (NPAs) was comfortable at 28 times as on June 30, 2024. Given the capital infusion and the asset-light business model, capitalisation should remain comfortable for the projected scale of operations over the medium term.
IIFL Finance reported a standalone networth and gearing of Rs 5,595 crore and 3.6 times, respectively as on March 31, 2024, Tier I capital adequacy ratio (CAR) and overall CAR stood at 12.56% and 18.85%, respectively, as on the same date. Networth coverage for net NPAs was around 17 times. IIFL Home had networth and gearing of Rs 6,447 crore and 2.7 times, and Tier I and overall CAR of 37.6% and 42.8%, respectively, and networth coverage for net NPAs of around 27 times. As on March 31, 2024, IIFL Samasta reported networth and gearing of Rs 2,010 crore and 4.5 times, respectively. Tier I and overall CAR on the same date were 17.7% and 24.0%, respectively.
Consolidated AUM witnessed a de-growth of 12% as on June 30, 2024 and stood at Rs 69610 crore as against Rs 78,960 crore as on March 31, 2024, driven by rundown in gold loan portfolio along with momentary slowdown in microfinance portfolio. Consolidated AUM stood at Rs 64,638 crore as on March 31, 2023, and Rs 51,210 crore, a year earlier. Majority of the book has been deployed in retail asset classes. Two lending subsidiaries, IIFL Home and IIFL Samasta, are engaged in mortgage finance and microfinance, respectively. 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 (ticket size less than Rs 1 crore) accounted for 98% of the consolidated AUM as on June 30, 2024, making the portfolio highly granular. Also, 67% of the portfolio, excluding gold loans, qualified under priority sector lending. As on June 30, 2024, the group was present across five key segments: home loans (40% of AUM), gold loans (21%), LAP (12%), digital loans (6%) and microfinance (17%), which together accounted for 98% of the AUM, up from 67% as on March 31, 2017.
With the embargo being lifted, the organic run down of the gold loan business has been arrested and hereon, disbursements are expected to pick up. Though the ability of the company to restore the run rate to pre-embargo levels, remains a monitorable. 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 scaling down its book under these segments, which together formed only 2% of the AUM. Under CRE, the group finances completion of projects already funded by it and is also looking at providing smaller ticket construction finance through IIFL Home, as it will be synergistic to its core business. In the capital market segment, the group finances retail clients of IIFL Securities Ltd. Market position benefits from a wide network of 4780 branches as on June 30, 2024, which allows the group to cross-sell financial products of other IIFL entities.
On a standalone level, IIFL Finance had an AUM of Rs 20,498 crore as on June 30, 2024 (Rs 29,250 crore as on March 31, 2024 and Rs 25,573 crore as on March 31, 2023) primarily comprising gold loans (72%), digital loans (23%), developer and construction finance (3%), loan against property (1%) and capital markets (1%). IIFL Home had an AUM of Rs 35975 crore as on June 30, 2024 (Rs 35499 crore as on March 31, 2024 and Rs 28,512 crore as on March 31, 2023), comprising home loans (78%), followed by LAP (20%) and construction finance (2%). IIFL Samasta had an AUM of Rs 13138 crore as on June 30 2024 ( Rs 14,211 crore as on March 31, 2024 and Rs 10,552 crore as on March 31, 2023).
Consolidated RoA and RoMA were 3.4% and 2.3%, respectively, in fiscal 2024 and 3.3% and 2.3%, respectively, for fiscal 2023. On an absolute basis, consolidated net profit was Rs 1,974 crore in the fiscal 2024 and Rs 1,608 crore in fiscal 2023. Earnings were supported by lower credit cost (provisions and write-offs/average managed assets). Credit cost was marginally better at 1.1% during fiscal 2024 vis-à-vis 1.2% in fiscal 2023 (1.6% in fiscal 2022). Consolidated RoA and RoMA were 2.2% and 1.6% respectively, with net profit stood at Rs 338 crore in first quarter of fiscal 2025. Earnings were impacted due to lower net interest margins (NIMs) and increase in operating expenses in the quarter. NIMs (Total net interest income/average managed assets) and operating expenses(operating expenses /average managed assets), on an annualized basis stood at 7.4% and 4.2% in Q1 FY25 vis-à-vis 7.7% and 3.6% during fiscal 2024.
On consolidated and standalone basis, gross NPAs (GNPAs) of IIFL Finance stood at 2.3% and 3.7%, respectively, as on March 31, 2024 (1.8% and 1.3%, respectively, as on March 31, 2023, and 3.2% and 2.9%, respectively, as on March 31, 2022). GNPAs spiked during March 2024 due to slippages in gold portfolio. GNPA stood at 2.2% and 3.1%, respectively on consolidated and standalone basis, as on June 30, 2024. Provision coverage ratio[1] as on June 30, 2024, stood at 51%, while the total provisions coverage ratio (total provisions/GNPA) was 128%. On a standalone basis, IIFL Home and IIFL Samasta reported GNPAs of 1.5% and 1.9%, respectively, as on March 31, 2024 (2.2% and 2.1%, respectively, on March 31, 2023, and 3.1% and 3.1%, respectively, on March 31, 2022). It stood at 1.7% and 2.3%, respectively, as on June 30, 2024. GNPAs for the home loan segment stood at 1.3%, for the gold loan portfolio at 2.9%, LAP at 3.6%, digital loans at 3.3% and microfinance at 2.3% as on June 30, 2024.
Ability to keep delinquencies under check and manage credit cost will remain critical for sustaining healthy profitability. With regard to the gold loan business, until the restrictions are lifted – the extent of decline in profitability, if any, remains a monitorable.
Weakness:
As on June 30, 2024, banks and financial institutions (FIs) constituted 75% of the on-book borrowings of the group-these were primarily in the form of term loans (46%), refinance (17%), short-term borrowings (2%), external commercial borrowings (9%) and others (1%). The remaining 25% of borrowings were in the form of non-convertible debentures (20%), external commercial borrowings from DFIs (4%) and commercial paper (1%). Of this, capital market lenders (such as mutual funds, pension funds, trusts) had limited share. IIFL Finance group has been able to tap the public NCDs route, but 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 June 30, 2024.
Over the medium to long term, ability to diversify the resource base at an optimal cost will be a monitorable, given the relatively higher reliance on banks and FIs. [1] Provision coverage ratio = Provisions against GNPAs/GNPAs |
Liquidity: Strong On a provisional basis, as on August 31, 2024, the IIFL Finance group had liquidity of Rs 4595 crore (Rs 3529 crore of cash and equivalents, Rs 354 crore of unutilised cash credit limit and Rs 713 crore of undrawn sanctioned bank limits [including securitisation/DA limit]). Against this, total debt obligation was Rs 3548 crore over the three months through November 2024. On a standalone basis, IIFL Finance had surplus cash of Rs 1436 crore as on August 31, 2024. This is sufficient to meet debt obligation of Rs 1345 crore till November 2024.
Environment, social and governance (ESG) profile CRISIL Ratings believes that the ESG profile of the IIFL Finance group supports its credit risk profile.
The ESG profile of financial institutions typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and its role in promoting financial inclusion. While there is no direct adverse impact on the environment, lending decisions could 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 and there is a split between positions of the chairman and CEO. Extensive investor grievance redressal disclosures and mechanism are 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: Stable IIFL Finance group is likely to maintain adequate capitalisation while restoring its growth momentum in the gold loan as well as overall portfolio, which is expected to aid overall profitability. |
Rating sensitivity factors Upward factors:
Downward factors:
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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. The group offers various retail lending products, including gold loans, home loans, LAP, digital loans and microfinance loans, which are the core segments and form 98% of the AUM. Capital market-based lending (margin funding and loans against shares) and construction and developer finance form the balance of the AUM.
On a consolidated basis, IIFL Finance had total income (net of interest expenses) and profit after tax (PAT) of Rs 6,290 crore and Rs 1,974 crore, respectively, in fiscal 2024, against Rs 5,225 crore and Rs 1,607 crore in the previous fiscal. The company had total income (net of interest expenses) and profit after tax (PAT) of Rs 1592 crore and Rs 338 crore, respectively, in first quarter of fiscal 2025
On a standalone basis, IIFL Finance reported total income (net of interest expenses) and PAT of Rs 2,932 crore and Rs 585 crore, respectively, in fiscal 2024, as against Rs 2,633 crore and Rs 806 crore, respectively, in the previous fiscal. The company had total income (net of interest expenses) Rs 585 crore and reported a loss Rs 23 crore, in first quarter of fiscal 2025.
IIFL Home reported total income (net of interest expenses) and PAT of Rs 1,966 crore and Rs 1,027 crore, respectively, in fiscal 2024, against Rs 1,549 crore and Rs 790 crore, respectively, in fiscal 2023. The company had total income (net of interest expenses) and profit after tax (PAT) of Rs 528 crore and Rs 247 crore, respectively, in first quarter of fiscal 2025. |
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 Annexure - Details of Rating Withdrawn
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Annexure – List of entities consolidated
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Criteria Details
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