IIFL Finance hits lowest level since Oct' 22; stock tanks 42% in 2 weeks

Multiple rating agencies including Fitch Ratings, Brickwork Ratings India, CRISIL Ratings, Care Ratings, and Icra have revised their ratings on IIFL Finance

Shares of IIFL Finance hit a 17-month low of Rs 360 as they slipped 3 per cent on the BSE in Friday's intraday trade after Fitch Ratings Singapore Pte Ltd (Fitch). and Brickwork Ratings India Private Limited (Brickwork) revised their ratings for the company.

On Tuesday, March 13, rating agencies CRISIL Ratings, Care Ratings, and Icra revised their ratings on IIFL Finance and IIFL Home Finance.

The revision in ratings follows a March 4, 2024 regulatory directive by the Reserve Bank of India (RBI) where it directed IIFL Finance to cease new gold-backed lending and related off-balance-sheet funding transactions.

Fitch Ratings has placed IIFL Finance's 'B+' Long-Term Issuer Default Rating (IDR), and medium-term note (MTN) programme rating on 'Rating Watch Negative' (RWN).

Brickwork Rating, meanwhile, placed the Long Term Ratings of the Non-Convertible Debentures (NCDs) on a rating 'Watch with Negative Implications'.

On the bourses, shares of IIFL Finance were trading at their lowest level since October 2022. In the past two weeks, the stock of the non-banking finance company (NBFC) has tanked 42 per cent.

The 'RWN' reflects downside risk to IIFL Finance's franchise, profitability, and overall risk profile if regulatory restrictions on new gold-backed lending are prolonged. Gold loans are a key product for the company, accounting for 32 per cent of assets under management and 18 per cent of gross on-book loans in the third quarter of the financial year ending March 2024 (Q3FY24).

"A prolonged stoppage on new gold loans is likely to dampen portfolio growth and profitability as the existing loan base runs down. We believe the gold-loan segment contributes a significant proportion of IIFL Finance's revenue and profit, considering the product's higher yield, at 19 per cent in Q3FY24, compared with 17.2 per cent across the portfolio, and typically better asset quality," Fitch Ratings said.

According to Brickwork Ratings, the restriction in the gold loan business might lead to a reduction in the overall loan portfolio and AUM. While there is less likelihood of an impact on other segments viz., Loan Against Property, Home Loan, Microfinance and others as per the management, the same remains monitorable.

"The issues highlighted by the regulator have raised concerns on the operational side of the compliance on the process, policy and technology used. This also raises concerns about financial flexibility and further fundraising for the group including an increase in interest rates or a debt acceleration and will be a key monitorable. In case the restrictions get prolonged the group's business risk profile, earnings and profitability could be impacted in the near medium term. Clarity is expected once RBI comes up with their subsequent reports," the ratings agency said.

CRISIL Ratings, too, said any impact on IIFL Finance’s financial flexibility and ability to raise funds could have a bearing on the growth in the other segments, including fund-raising by the Group companies, i.e. IIFL Home Finance Limited and IIFL Samasta Finance Limited. "With the restrictions on lending in the gold segment, the Group’s profitability is likely to be negatively impacted, depending on the duration of the ban," it added.

In a separate development, IIFL Finance said on Wednesday it would raise funds up to Rs 2,000 crore ($241.5 million) to shore up its capital, in addition to up to $200 million in liquidity support from top shareholder Fairfax India