SME, microfinance stress to add pressure on IIFL's asset quality: Fitch

Affirms IIFL Finance's long-term rating; removes from rating watch negative

While affirming IIFL Finance Ltd's long-term issuer default rating at "B+", Fitch Ratings today said that ongoing weaknesses in small and medium enterprises (SME) and microfinance may exert further pressure on the group's asset quality.

 

The rating agency removed IIFL Finance from the rating watch negative status following the lifting of curbs by the Reserve Bank of India (RBI) on its gold loan business in September. The rating indicates that material default risk is present, but a limited margin of safety remains.

 

Fitch, in a statement, said that the removal of the regulatory embargo suggests the finance company has adequately addressed the RBI’s concerns regarding its gold-backed lending practices. Risk and compliance standards are therefore likely to have improved. The company has also introduced new risk and compliance personnel, which may further strengthen controls and oversight.

 

The affirmation and stable outlook reflect Fitch’s expectation that IIFL Finance's franchise will gradually stabilise.

 

Fitch said that higher impairments in the two segments led to an uptick in the reported gross non-performing asset (NPA) ratio, to 2.4 per cent in Q2FY25. IIFL Finance's moderate reported NPA ratio partly reflects its practice of disposing of problem loans through bad debt sales.

 

Nonetheless, the group retains exposure to credit risk, as the sales are on deferred payment terms, with receivables linked to underlying recoveries and reported as investment assets, the rating agency said.

 

Funding towards the gold-backed lending entity remains tentative, which could continue to restrain growth in this product. Nonetheless, funding volume for the housing finance and microfinance subsidiaries has been more resilient, which should support the credit profile of the consolidated group, even if it does not quickly regain its past scale and scope.