Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Strong financial and managerial support from IIFL Finance

The parent will continue to provide support on an ongoing basis and in the event of distress, given its majority ownership and IIFL Samasta’s strategic importance to the group, and presence in the board of directors. The microfinance business is strategically important and helps diversify the financial product suite of the parent and expand its presence in the financial inclusion space. Also, the microfinance business is scalable, and expected to grow significantly over the medium term. IIFL Samasta’s business is well established and growing at a healthy pace and formed around 16.8% of the group’s AUM as on December 31, 2023. Regular financial support—through equity infusion—and strategic inputs from IIFL Finance have enabled the company to ramp-up operations. IIFL Finance has infused incremental capital of Rs 940 crore post-acquisition (in 2016), with the latest infusion of Rs 400 crore in calendar year 2023 and is expected to provide further capital on a regular basis. It also has representatives on the board and senior management of IIFL Finance is actively involved in managing the treasury. Hence, CRISIL Ratings believes IIFL Finance has a strong moral obligation to continue supporting IIFL Samasta.

Adequate capitalisation

Networth was adequate at Rs 1821 crore as on December 31, 2023 against Rs 1272 crore as on March 31, 2023. The capital position is supported by regular infusions by the parent, IIFL Finance, as is evidenced by the latest Rs 200 crore infusion done in February 2023 and another round of Rs 200 crore in November 2023. The gearing improved to 4.5 times as on December 31, 2023, as against 5.6 times as on March 31, 2023 (5.3 times as on March 31, 2022). The capital adequacy ratio (CAR) continued to be comfortable at 24.3% as on December 31, 2023 (against 17.1% as on March 31, 2023). On account of the parents’ ability and willingness to infuse capital when required, IIFL Samasta’s capitalisation is expected to remain adequate over the medium term in the normal course of business.

Above-average earnings profile

IIFL Samasta’s profit at pre provisioning level stood at Rs 613.8 crore as on March 31, 2023. During fiscal 2023, despite the company continuing with higher provisioning and write-offs worth Rs 450 crore, it reported profit after tax (PAT) of Rs 128 crore with return on managed assets (RoMA) of 1.4% (as against Rs 50.6 crore and 0.8%, respectively, during fiscal 2022). During the nine months of fiscal 2024, RoMA rose to around 3.7% (on an annualised basis; one of the highest since inception) while PAT was Rs 383 crore despite write-offs worth Rs 277 crore. The credit cost for the nine months of fiscal 2024 (Provisions + last 12 months write-offs) stood at 5.4% as against 4.9% during fiscal 2023. Profitability has grown significantly post the revised regulation of RBI wherein the interest margin cap (of 10%) was discontinued. This has resulted in micro finance institutions (MFIs) going for risk-based pricing by increasing the yields. In the case of IIFL Samasta, the yield increase has been 150-200 basis points (bps) during the last 2-3 quarters. With higher yields (on incremental originations), the benefits of the same is directly visible in profitability. CRISIL Ratings believes that the industry at large (including IIFL Samasta) is expected to reap the benefits from the same over the medium term. Nevertheless, with the aggressive growth witnessed, the ability to maintain asset quality (in order to avoid any potential credit costs) for sustaining its earnings profile will remain a key rating sensitivity factor.

Improving diversity in funding profile

IIFL Samasta has significantly improved the diversity in its resource profile since its acquisition by IIFL Finance. Resource profile as on December 31, 2023 comprises of bank funding (63.9%), Non-Convertible Debenture funding (2.5%), securitisation {DA} (nil), refinance (16.4%), commercial paper [CP (2.8%)], sub debt (14.3%) etc. In terms of cost of borrowing, it remained around 10.45% during the nine months of fiscal 2024 as against 9.46% during fiscal 2023. Post increase in interest rates in the market, the cost of borrowing has seen some elevation in the past 3-4 quarters.

Weaknesses:

Geographic concentration in operations

Though diversifying gradually, the loan portfolio of IIFL Samasta is still highly concentrated with 67.5% of its overall portfolio as on December 31, 2023, housed in three states: Tamil Nadu, Bihar and Karnataka. The top five districts accounted for 9.9% of the loan book. The company as on December 31, 2023, has operations in 22 states. Of these, growth of disbursements in Bihar has been particularly rapid, reflected in the proportion of AUM in the state increasing from 1.1% as on March 31, 2018 to 20.8% as on March 31, 2023. However, there has been a spurt in microfinance lending in certain states such as Odisha, Bihar, and West Bengal, showing early signs of overheating in certain pockets, thus the ability of the company to manage portfolio quality in these regions is a key monitorable. CRISIL Ratings will continue to monitor the situation and its likely impact on credit losses as it evolves.

Average asset quality

The company’s 90+ days past due adjusted for write-offs and net loss on ARC transaction (dpd) improved to 3.0% as on December 31, 2023 as compared to 3.3% as on March 31, 2023. The company did write-offs of about Rs 277 crore during the nine months of fiscal 2024 along with the sale to ARC of Rs 778 crore. As far as collection efficiency is concerned, (including overdues but excluding prepayments) it improved to over 97% during the second and third quarters of fiscal 2024 from 95% during the previous fiscal. Nevertheless, considering the pace of growth, the company’s ability to sustain collection efficiency and eventually reach pre-pandemic levels of over 99% on a steady-state basis will remain a key monitorable.

Susceptibility to regulatory and legislative risks associated with the microfinance sector

The microfinance sector witnessed two major disruptive events in the past decade. The first was the crisis promulgated by the ordinance passed by the government of Andhra Pradesh in 2010, and the second was demonetisation in 2016. In addition, the sector faced issues of varying intensity in several geographies. Promulgation of the ordinance on MFIs by the government of Andhra Pradesh in 2010 demonstrated their vulnerability to regulatory and legislative risks. The ordinance triggered a chain of events that adversely affected the business models of MFIs by impairing their growth, asset quality, profitability and solvency. Similarly, the sector witnessed high level of delinquencies post-demonetisation and subsequent socio-political events. For IIFL Samasta, the ultimate credit loss due to disruption after demonetisation was close to 14.3%, which was borne over two fiscals. The MFI Bill, 2020 passed recently by the Assam Assembly may increase asset-quality challenges for MFIs. Additionally, any loan waivers announced will make matters worse due to their impact on repayment discipline. In addition, the sector remains susceptible to issues such as local elections, natural calamities and borrower protests among others, which may result in momentary spurt in delinquencies. This indicates the fragility of the business model to external risks. As the business involves lending to the poor and downtrodden sections of society, MFIs will remain exposed to socially sensitive factors, including high interest rates, tighter regulations and legislation.