CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper of IIFL Finance Limited (IIFL Finance). CRISIL has also reaffirmed its 'CRISIL AA/CRISIL PP-MLD AAr/Stable/CRISIL A1+' rating on the debt instruments and bank facilities, respectively of India Infoline Finance Ltd (India Infoline Finance ; part of IIFL Finance group), which was transferred to IIFL Finance, post amalgamation
 
In January 2018, IIFL Finance Ltd announced plans to reorganise its corporate structure, and list the three entities - IIFL Finance (loans and mortgages business), IIFL Wealth (wealth and asset management business), and IIFL Securities (capital markets and other businesses).
 
In May 2019, as part of this restructuring scheme, IIFL Wealth and IIFL Securities were demerged from IIFL Finance and subsequently were listed in September 2019. In March 2020, India Infoline Finance was merged into IIFL Finance, the listed entity of the lending business.
 
The ratings continues to reflect the IIFL Finance group's diversified retail product offerings, the extensive branch network and adequate capitalisation. These rating strengths are partially offset by limited seasoning of the loan portfolio.
 
The nationwide lockdown (originally till April 14, 2020) declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have a near-term impact on disbursements and collections of financial institutions. The lockdown is now extended till May 3, 2020, and there is high likelihood that eventual lifting of restrictions will be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics of companies. Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.
 
On the liability side, the Reserve Bank of India (RBI) announced regulatory measures under 'Covid-19 - Regulatory Package'Â?, whereby lenders were permitted to grant moratorium on bank loans. The recent uncertainty on whether NBFCs are considered eligible for moratorium has resulted in some delay in decision-making by the lenders. In absence of moratorium on bank loans, the liquidity profile of a few NBFCs could come under pressure. CRISIL will continue to monitor the situation closely for all its rated companies.
 
IIFL Finance group entities have also approached all lenders to avail moratorium on their bank borrowings and the same has been granted by few of the lenders. On the asset side, the group has offered moratorium to its borrowers and hence, the collections are expected to be impacted till May 31, 2020.
 
Thereafter, most of the segments wherein the company operates - micro, small and medium enterprise (MSME) finance, home loans, gold loans and micro finance, could still witness challenges, especially in the cash salaried and self-employed segment, wherein income streams of borrowers is likely to be affected given the challenging macro environment. The group has so far witnessed collections during the lockdown period of around 55-60% in its home loans, ~60-65% in SME loans whereas collections in the gold loans and micro loans have been significantly lower. The group is taking steps to improve its collections by engaging and reaching out to the borrowers and is also planning to start some of operations from April 20, 2020.
 
IIFL Finance group, on a consolidated basis, has adequate current liquidity to manage this period wherein asset-side collections will be limited while liability-side outflows continue as per schedule. As on March 31, 2020, the company had a liquidity cushion of Rs 5,425 crore (Rs 1,209 crore of cash and equivalents, Rs 616 crore of liquid investments and Rs 3600 crore of unutilized committed bank lines including securitization lines). Against this, it has total debt repayment of Rs 2,360 crore over the three months through June 2020 and Rs 4,020 crore over the next six months through September 2020.
 
CRISIL will continue to closely monitor the collections of the group and its impact on the company's cashflows as well as asset quality. Ability of the group to access funds from diverse sources at a competitive rate will also remain a key monitorable.

For arriving at the ratings, CRISIL has consolidated the business and financial risk profiles of IIFL Finance and its subsidiaries, including IIFL Home Finance Ltd (IIFL Home) and Samasta Microfinance Ltd (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. Further, CRISIL has also factored in the business synergies that IIFL Finance group will have with IIFL Wealth and IIFL Securities, given their common promoters and the shared brand.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

The asset liability maturity (ALM) profile of IIFL Finance shows that liquidity position, on a consolidated basis, is strong, with positive cumulative mismatches in most of the buckets up to one year as of December 2019. The housing finance business, however, has mismatches, given the relatively long tenure of its assets, vis-a-vis its borrowings. The mismatches are, nevertheless, efficiently managed, through unutilised bank lines.
 
As on March 31, 2020, the company had liquidity of Rs 1,825 crore in cash and bank balance including liquid investments and Rs 3,600 crore of unutilized committed lines (including securitisation lines). Against this, it has total debt repayment of Rs 2,342 crore over the three months through June 2020 and Rs 3,821 crore over the next six months through September 2020.
 
The group has raised Rs 22,407 crores between April 2019 and March 2020, via NCDs (including retail issuances), bank funding, external commercial borrowings and securitisation. The group has reduced its dependence on commercial paper (CP) borrowing, which has reduced to nil as on December 31, 2019 from 24% as on September 30, 2018.
 
Of the incremental funding raised, the proportion of bank funding and NCDs has been on an increasing trend. In the last two quarters of fiscal 2020, the company raised long term funds of Rs 7,275 crores (of which Rs 4,554 crores was raised in the quarter ended March 31, 2020) through bank funding and NCDs including public retail bond issuances and external commercial borrowings

CRISIL believes the IIFL Finance group will continue to benefit from its diversified product offerings and adequate capitalisation.
 
Rating Sensitivity Factors
Upward Factors:
* Significant improvement in market position while improving asset quality
* Improvement in profitability, with return on managed assets (RoMA) beyond 3.0% on a sustained basis
 
Downward Factors:
* Deterioration in the asset quality, with GNPA increasing to above 5% over an extended period, thereby impacting profitability
* Further drop in collections metrics
* Weakening of capitalisation metrics with higher than expected adjusted gearing on a sustained basis
* Continued funding access challenges for non-banking sector with limited fund-raising by IIFL Finance Group and reduction in liquidity levels

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 finance company (NBFC). The group offers various retail lending products, including gold loans, home loans, LAP, business loans, micro finance and capital market based lending (margin funding and loan against shares).  It also offers construction and developer finance.
 
In fiscal 2008, IIFL Finance (erstwhile IIFL Holding Ltd) had launched its retail finance business through the NBFC, Moneyline Credit Ltd, which was later merged with India Infoline Finance, with effect from April 2011. In fiscal 2009, India Infoline Housing Finance Ltd received a registration as a housing finance company from the National Housing Bank and was subsequently renamed as IIFL Home Finance. In fiscal 2017, IIFL Finance ventured into microfinance segment after acquisition of micro lender Samasta Microfinance. As of December 31, 2019, promoters hold 29.4% stake in IIFL Finance and 35.4% is held by Prem Watsa controlled Fairfax Holdings.
 
CRISIL has also analysed the standalone financials of India Infoline Finance (now merged with IIFL Finance). The company reported a total income (net of interest expenses) and profit after tax (PAT) of Rs 1,518 crore and Rs 384 crore, respectively, in fiscal 2019, against Rs 1,238 crore and Rs 227 crore, respectively, in the previous fiscal. The company had networth and total assets of Rs 3,501 crore and Rs 17,719 crore, respectively, as on March 31, 2019.  For the nine months ended December 31, 2019, the company reported a total income (net of interest expenses) and PAT stood of Rs 140 crore and Rs 946 crore as against a total income (net of interest) and PAT of Rs 234 crore and Rs 1,047 crore in the corresponding period of the previous fiscal. The company had net worth and total assets of Rs 3639 crore and Rs 16,775 crore, respectively, as on December 31, 2019. 
 
IIFL Finance (consolidated) had total income (net of interest expenses) and PAT of Rs 2,500 crore and Rs 804 crore, respectively, in fiscal 2019. For the nine months ended December 31, 2019, the total income (net of interest expenses) was Rs 1703 crore and PAT of Rs 444 crore, against Rs 1687 crore and Rs 490 crore, respectively, for the corresponding period of the previous fiscal. Excluding the one-time expense on account of reversal of deferred tax, PAT stood at Rs 543 crore for the period ended December 31, 2019.

Any other information
Earnings profile of the company has remained range bound. Return on managed assets [RoMA; profit after tax / (total assets + securitization/assignment)] stood at around  1.4% (annualized) for the nine months ended December 31, 2019, excluding the one-time expense on account of reversal of deferred tax, RoMA stood at 1.8% for the above period (around  1.8%  for fiscal 2019; this included the one-time gain on sale of CV business). While the profitability is supported by healthy net interest margin, operating expenses remain high, given the investment in opening of new branches, strengthening of work force and building the technological infrastructure. With the scale up of loan book, operating efficiency is expected to improve gradually, which will support the earning profile. Also, while credit costs have remained under control, the ability of the company to manage asset quality specifically in the wholesale book, will be a key determinant of profitability going forward.