| IIFL Samasta Finance Limited | ||||||||||||||||||
| 'CRISIL AA-/Watch Developing' assigned to Non Convertible Debentures; Long-term rating continues on 'Watch Developing’; Rated amount enhanced for Commercial Paper | ||||||||||||||||||
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| & Interchangeable between secured and subordinated debt% Public Issue^ Interchangeable between secured and subordinated debt | ||||||||||||||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||||||||||||
| 1 crore = 10 million | ||||||||||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA-’ rating to the Non-Convertible Debentures of IIFL Samasta Finance Ltd (IIFL Samasta, a part of IIFL Finance group) and placed the rating on 'Rating Watch with Developing Implications’. Outstanding rating on the long term bank facilities and long term debt instruments continue to be on 'Rating Watch with Developing Implications’. The commercial paper has been reaffirmed at 'CRISIL A1+'.
CRISIL Ratings has also withdrawn its rating on the Long-term principal protected market linked debentures of Rs 133.8 crore and Principal protected market linked non-convertible subordinated debentures of Rs 100 crore (see Annexure - Details of Rating Withdrawn) on receipt of independent confirmation that these instruments are fully redeemed, in line with its withdrawal policy. On March 12, 2024, CRISIL Ratings placed the rating on watch, subsequent to a similar action on the parent, IIFL Finance Ltd (IIFL Finance). The Reserve Bank of India (RBI) on March 04, 2024, issued a directive ordering IIFL Finance to cease and desist from sanctioning and disbursing gold loans, or assigning/securitising/selling any of its gold loans. However, the RBI has allowed the company to continue servicing its existing gold loan portfolio, through usual collection and recovery processes. CRISIL Ratings understands that IIFL Finance has been in continuous engagement with the RBI and the restriction imposed would be reviewed upon completion of RBI’s special audit which has been underway since April 23, 2024. Earlier, the chairman of the board of IIFL Finance, who is also an independent director, had stated that the company has addressed all the gaps cited by the regulator and was fully compliant with all RBI requirements as of March 11, 2024. Subsequently, the company also received a commitment of $200 million (~Rs 1,560 crore) liquidity line by Fairfax India – which has been a long-term strategic investor in IIFL Finance and currently holds 15.1% in the company. In light of this issue and the special audit being in progress, CRISIL Ratings will continue to closely monitor the developments pertaining to this restriction. In the near term, this restriction on the gold loan business will lead to reduction in overall AUM, while other key businesses of the group viz, home loans, microfinance, loan against property and others, are not directly impacted by this RBI directive. However, the issues raised by the regulator bring forth questions on the operational processes and compliances. These developments could have a second order impact on fund raising for the group given the confidence sensitive nature of the funding environment for NBFCs - which could, in turn, impact growth in the other segments, and will remain a key monitorable. In a scenario where this restriction is not lifted for a prolonged period, the company’s business risk profile and profitability could be impacted in the medium to long run. The watch shall be resolved once greater clarity emerges on RBI’s final decision on this matter. Any rating movement on IIFL Samasta’s debt and bank loan facilities will be closely linked to rating movement on parent’s (IIFL Finance) debt instruments and bank loan facilities. Upon resolution, CRISIL Ratings believes that the rating of IIFL Samasta is unlikely to change by more than one notch at this juncture. The ratings of IIFL Samasta continue to factor in the expectation of strong financial and managerial support from the parent, IIFL Finance. The rating also factors in the shared name of the company, which further enhances the moral obligation of IIFL Finance to support IIFL Samasta. Additionally, the rating also reflects adequate capitalisation, above-average earnings profile and improving diversity in resource profile. These strengths are partially offset by IIFL Samasta’s geographic concentration in revenue, ability to manage asset quality and control credit losses and susceptibility to regulatory and legislative risks associated with the microfinance sector. |
Analytical Approach CRISIL Ratings has analyzed the standalone business and financial risk profiles of IIFL Samasta and has factored in the strong support the company is likely to receive from its parent, IIFL Finance, on an ongoing basis and in times of distress. |
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 2010 crore as on March 31, 2024 against Rs 1322crore as on March 31, 2023. The capital position is supported by regular infusions by the parent, IIFL Finance, as is evidenced by the Rs 200 crore infusion done in February 2023 and another round of Rs 200 crore in November 2023. The gearing improved to 4.6 times as on March 31, 2024, as against 5.4 times as on March 31, 2023 (5.3 times as on March 31, 2022). The capital adequacy ratio (CAR) continued to be comfortable at 24.0% as on March 31, 2024 (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 During fiscal 2024, the company’s profit after tax (PAT) has improved to Rs 503 crores with return on managed assets (RoMA) of 4.2% as against a PAT of Rs 128 crore with RoMA of 1.4% during fiscal 2023 (as against Rs 50.6 crore and 0.8%, respectively, during fiscal 2022). The credit cost for the fiscal 2024 (Provisions + last 12 months write-offs) stood at 3.5% as against 5.2% during fiscal 2023. The company has written-off Rs 388.73 crores with Net Loss on asset reconstruction company (ARC) transaction worth Rs 78.8 crores during fiscal 2024 as against a write-off of Rs 450.9 crores and Net Loss on a sale to ARC transaction worth Rs 239.33 crores 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. The Net interest margin (Net Interest Income/Average Managed assets) of the company has improved to 12.8% during fiscal 2024 as against 11.2% during fiscal 2023, the benefits of the same is directly visible in profitability. Nevertheless, given the pace of growth has remained high, the company’s 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 March 31, 2024, comprises of bank funding (53.2%), Non-Convertible Debenture funding (8.4%), refinance (12.8%), commercial paper [CP (2.2%)], sub debt (5.7%) and Securitization (17.7%). In terms of cost of borrowing, it remained around 10.52% during 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 49% of its overall portfolio as on March 31, 2024, housed in three states: Bihar (22.3%), Tamil Nadu (14.3%) and Karnataka (13.0%). The top five districts accounted for 9.9% of the loan book. The company as on March 31, 2024, 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 22.0% as on March 31, 2024. However, there has been a spurt in microfinance lending in certain states such as Punjab (0.1%), Haryana (0.4%), Madhya Pradesh (3.9%) etc. due to Karza mukt bharat abhiyan showing asset quality challenges in certain pockets, however the geographical concentration and growth in these regions have been limited, thus the ability of the company to manage portfolio quality in these regions is a key monitorable.
Average asset quality The company’s 90+ days past due adjusted for write-offs improved to 4.9% on March 31, 2024, as compared to 6.2% as on March 31, 2023. The company did write-offs of about Rs 388.8 crore during fiscal 2024 along with the sale to ARC of Rs 78.8 crore. As far as collection efficiency is concerned, (including overdues but excluding prepayments) it remained at over ~97.5 during fiscal 2024 from 95% during the previous fiscal. Recently due to the Karza mukt bharat abhiyan campaign there has been asset quality challenges across the industry in certain pockets of the country especially the epicentre being Punjab and Haryana, however the exposure of IIFL Samasta in these states is negligible hence no major impact is anticipated here. CRISIL Ratings will nevertheless continue to monitor the situation and its likely impact on credit losses as it evolves. Additionally, considering the pace of growth, the company’s ability to sustain collection efficiency and eventually reach ~98-99% on a steady-state basis will remain a key monitorable.
Potential risk from local socio-political issues in the microfinance sector The microfinance sector has witnessed various events over the years, including regulatory and legislative challenges that have resulted in disruption in operations. Some of these major events include Andhra crisis, demonetization in 2016, Covid-19 pandemic, and socio-political issues specific to certain states. These events have adversely affected the sector, leading to elevation in delinquencies and resulting in adverse impact on profitability and capital for the NBFC-MFIs. These challenges underscore the vulnerability of the microfinance business model to external risks. The COVID-19 pandemic in particular had introduced new challenges, aggravating existing vulnerabilities within the microfinance sector. It heightened credit risks and increased the likelihood of loan defaults among borrowers.
While the sector, on overall basis, has been able to manage all these major events, it continues to remain susceptible to events including local elections, natural calamities, and borrower protests among others, which may result in a momentary increase in delinquencies. In the case of IIFL Samasta, the ultimate credit loss for Samasta due to disruption after demonetization and Covid-19 pandemic was high. This indicates the fragility of the business model to external risks. MFIs will remain exposed to socially sensitive factors, including high interest rates, tighter regulations, and legislation. |
Liquidity: Strong Liquidity buffer (cash and liquid investments as on March 31, 2024), at a standalone level, to cover total debt repayment and operating expenses for the succeeding three months was 2.3 times (assuming 75% collection efficiency). Additionally, IIFL Finance will provide timely fund support for servicing of debt, if needed. Consolidated liquidity position: 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. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company IIFL Samasta, an NBFC and MFI, is a majority-owned subsidiary of IIFL Finance. IIFL Samasta started operations in March 2008 by taking over Colanac Finance Ltd, an NBFC. It follows the standard Grameen Bank model and lends to groups of five. The centres have 25-30 members. IIFL Finance acquired significant stake in IIFL Samasta in fiscal 2017, which stood at 99.51% as on March 31, 2024. |
Key Financial Indicators
*90 dpd #including the BC portfolio |
Any other information: Not Applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable between secured and subordinated debt ^Yet to be issued
Annexure - Details of Rating Withdrawn
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Criteria Details
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