Detailed Rationale

CRISIL Ratings has reaffirmed its ratings of 'CRISIL AA/CRISIL PP-MLD AA r/Stable/CRISIL A1+’ on the debt instruments and bank facilities of IIFL Home Finance Limited (IIFL Home).

 

CRISIL Ratings has also withdrawn its ratings on the Rs 182.78 crore non-convertible debentures (NCDs) as there is no amount outstanding against the rated instruments. This is in line with CRISIL Ratings withdrawal policy.

 

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

 

Pandemic-led lockdowns disrupted economic activity and exerted pressure on the cash flow of borrowers. Consequently, collections dropped both in the first and second waves but recovered gradually owing to subsequent easing of movement restrictions. Collection efficiency improved to 101% for December 2021, while on a segmental basis, it improved to 100% for home loans, 97% for business loans, 98% in micro-finance, and more than 100% 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 has a restructured portfolio of around 2.8% of loan book as on December 31, 2021. Also, gross non-performing assets (GNPAs/loans) inched up to 2.79% as on December 31, 2021, from 2.14% as on March 31, 2021, mainly on account of the pandemic and impact from the clarification released by the RBI on November 12, 2021. Ability to manage collections and asset quality will be a key monitorable.

Analytical Approach

To arrive at its ratings, CRISIL Ratings has consolidated the business and financial risk profiles of IIFL Finance and its subsidiaries, including IIFL Home Finance Ltd (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 also 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 with extensive branch network

Consolidated assets under management (AUM) was Rs 46,780 crore as on December 31, 2021 (Rs 44,688 crore as on March 31, 2021). IIFL Finance is primarily engaged in secured 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 92% of the AUM as on December 31, 2021, with a high level of granularity (loans of less than Rs 1 crore). Also, 67% of the portfolio qualified under priority sector lending as on December 31, 2021. The company has four key segments: home loans (35% of AUM as on December 31, 2021), gold loans (31%), business loans[1] (15%), and microfinance (11%), which together accounted for 92.4% of the AUM as on December 31, 2021, 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 that together accounted for only 7.5% as on December 31, 2021. Under CRE, it continues to finance the completion of projects that were already funded by the company, while the capital market segment finances the retail clients of IIFL Securities Ltd.

 

Network was wide at 3,119 branches as of December 2021, spread across 25 states and union territories. The company leverages its distribution network to cross-sell financial products of other IIFL entities. It has made substantial investments in technology to further leverage geographical reach.

 

On a standalone level, IIFL Finance had an AUM of Rs 19,323 crore as on December 31, 2021 (Rs 19,199 crore as on March 31, 2021) primarily towards gold loans (76%), business loans (9%), developer and construction finance (12%) and capital markets (4%).

 

IIFL Home had an AUM of Rs 22,207 crore as on December 31, 2021 (Rs 20,694 crore as on March 31, 2021), largely toward home loans (74%), followed by LAP (24%) and construction finance (2%).

 

IIFL Samasta had an AUM of Rs 5,250 crore as on December 31, 2021 (Rs 4,796 crore as on March 31, 2021).

 

Adequate capitalisation

Consolidated networth was around Rs 6,089 crore as on December 31, 2021 (Rs 5,393 crore as on March 31, 2021). Networth coverage for net non-performing assets (NPAs) was comfortable at 12 times as on December 31, 2021 (16 times as on March 31, 2021). On-book gearing as on same date was adequate at around 5.5 times; however, CRISIL Ratings-adjusted gearing (on-book borrowings + securitisation/assignment) was higher at around 8.2 times. Nevertheless, the group has demonstrated its ability to raise capital from long-term marquee investors such as Fairfax and the CDC group. Given the growth plans and business strategy, capitalisation should remain 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, 2021, IIFL Finance (standalone) had networth and CRISIL Ratings-adjusted gearing of Rs 4,240 crore and 5.1 times, respectively. Tier-I capital adequacy ratio (CAR) and overall CAR was 18.0% and 25.4%, respectively. Networth coverage for net NPAs was around 19 times.

 

As on December 31, 2021, IIFL Home had networth and CRISIL Ratings-adjusted gearing of Rs 2,581 crore and 7.9 times, respectively. Tier-I and overall CAR stood at 22.1% and 31.7%, respectively. Networth coverage for net NPAs was around 12 times.

 

As on December 31, 2021, IIFL Samasta had networth and CRISIL Ratings-adjusted gearing of Rs 874 crore and 5.4 times, respectively. Tier-I and overall CAR were 18.2% and 20.4%, respectively.

 

Weakness:

Average, albeit improving, profitability

While profitability improved with RoMA (return on managed assets; adjusted for income from direct assignment [DA]) at 1.5% for the nine months ended December 31, 2021, from 1.3% in fiscal 2021 (0.9% in 2020), it remains modest. Including income from DA, RoMA stood at 2.1% for the nine months ended December 31, 2021 (1.6% for fiscal 2021). Reported net profit was Rs 867 crore, up from Rs 761 crore (Rs 503 crore in fiscal 2020).

 

Improved net interest margin backed by product mix and lower cost of funds in fiscal 2021 was partially offset by higher credit cost at 2.4% compared with 1.2% in fiscal 2020. Credit cost improved thereafter to 1.6% in the nine months ended December 31, 2021. Elevated credit cost was mainly due to Covid-19, which led to increase in delinquency levels.

 

The GNPA increased to 2.79% as on December 31, 2021, from 2.14% as on March 31, 2021 (2.31% as on March 31, 2020). Apart from this, the company had 2.8% of loan book under restructuring as on December 31, 2021. GNPA for the home loan segment was 1.8%, gold loan was 0.9%, business loans 6.6%, and microfinance 3.6%.

 

The company is increasingly looking at partnership model and co-lending is expected to contribute to improving profitability as this book materially scales up over the medium term. Nevertheless, ability to maintain delinquency levels and manage credit costs will be closely monitored.

 

The GNPA of IIFL Finance (standalone), IIFL Home and IIFL Samasta stood at 3.0%, 2.3% and 3.6%, respectively, as on December 31, 2021 (2.4%, 2.0% and 1.8%, respectively, as on March 31, 2021).

[1] Business loans include loan against property (LAP) and unsecured loans to micro small and medium enterprises.

Liquidity: Storng

As on January 31, 2022, the company had liquidity cushion of Rs 5,728 crore (Rs 3,409 crore of cash and equivalents, Rs 1,897 crore of unutilised cash credit limit and Rs 2,776 crore of unutilised bank limit, including securitisation limit). Against this, total debt obligation was Rs 4,549 crore over the four months through May 2022.

Outlook Stable

IIFL Finance will maintain its diversified product offerings and adequate capitalisation.

Rating Sensitivity factors

Upward factors:

* Significant improvement in market position with better asset quality

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

 

Downward factors:

* Deterioration in asset quality, with GNPA increasing to above 5% over an extended period, thereby impacting profitability

* Weakening of capitalisation metrics with higher-than-expected gearing on a sustained basis

About the Company

IIFL Home is a wholly owned subsidiary of India Infoline Finance and is registered with National Housing Bank (NHB) as a housing finance company (HFC). The company primarily offers low ticket home loans, LAP and corporate mortgage loans (lower ticket developer funding).

 

CRISIL has also analysed the standalone financials of IIFL Home. On a standalone alone basis, for the nine month ended December 31, 2021, IIFL Home reported a total income (net of interest expenses) and PAT of Rs 818 crore and Rs 424 crore, respectively, against Rs 1,014 crore and Rs 401 crore, respectively, during fiscal 2021.

 

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 financial company (NBFC). The group offers various retail lending products, including gold loans, home loans, LAP, business loans, microfinance and capital market-based lending (margin funding and loans against shares). It also offers construction and developer finance.

 

In fiscal 2008, IIFL Finance (erstwhile, IIFL Holdings Limited) launched its retail finance business through the NBFC, Moneyline Credit Ltd, which was merged with India Infoline Finance Ltd. In fiscal 2009, India Infoline Housing Finance Ltd received registration as a housing finance company from the National Housing Bank and was subsequently renamed IIFL Home. In fiscal 2017, IIFL Finance ventured into microfinance after the acquisition of micro lender, Samasta Microfinance.

 

In January 2018, IIFL Finance announced plans to reorganise its corporate structure and list IIFL Finance (loans and mortgages business), IIFL Wealth Management Ltd (wealth and asset management business), and IIFL Securities Ltd (capital markets and other businesses). As part of the restructuring scheme, IIFL Wealth Management Ltd and IIFL Securities Ltd were demerged from IIFL Finance in May 2019 and were listed in September 2019. In March 2020, India Infoline Finance Ltd was merged into IIFL Finance, the listed entity of the lending business.

 

As of December 2021, promoters held 24.93% stake in IIFL Finance, while 22.31% is held by Mr Prem Watsa-owned Fairfax Holdings and 7.78% by CDC Group PLC.

 

On a standalone alone basis, for the nine months ended December 31, 2021, IIFL Finance reported a total income (net of interest expenses) and profit after tax (PAT) of Rs 1,794 crore and Rs 515 crore, respectively, against Rs 1,298 crore and Rs 183 crore, respectively, in the corresponding period previous fiscal.

 

On a consolidated basis, for the nine months ended December 31, 2021, IIFL Finance had a total income (net of interest expenses) and PAT of Rs 2,871 crore and Rs 867 crore, respectively, against Rs 2,396 crore and Rs 513 crore, respectively, in the corresponding period previous fiscal.

Key Financial Indicators : IIFL Finance (consolidated; CRISIL Ratings-adjusted numbers)

As on / for the period ended		March 2021	March 2020
Total assets	Rs crore	40667	34341
Total income (net of interest expenses)	Rs crore	3364	2424
PAT^	Rs crore	761	503
GNPA	%	2.14	2.31
RoMA (annualised)^	%	1.6	1.2
Gearing	Times	5.1	5. 2
Adjusted gearing	Times	8.1	7.7

Adjusting for one-time exceptional items, PAT and RoMA stood at Rs 764 crore and 1.8%, respectively, for fiscal 2020.

 

IIFL Finance (standalone; CRISIL Ratings-adjusted numbers)

As on / for the period ended		March 2021	March 2020
Total income (net of interest expenses)	Rs crore	1881	1385
PAT	Rs crore	343	149
GNPA	%	2.98	3.1
Gearing	Times	3.2	3.3
Adjusted gearing	Times	5.5	4.7

Note: Excluding commercial vehicle business

 

IIFL Home Finance (standalone; CRISIL Ratings adjusted numbers)

As on / for the period ended		March 2021	March 2020
Total income (net of interest expenses)	Rs crore	1,014	716
Profit after tax	Rs crore	401	245
Gross NPA	%	2.0	1.6
Adjusted gearing	Times	8.6	9.9

Note: Excluding commercial vehicle business

Any other information: Not applicable