IIFL Finance Put On Rating Watch Negative By Fitch Ratings
The move reflects the downside risks to IIFL Finance's franchise, profitability and overall risk profile.
Fitch Ratings has put IIFL Finance Ltd.'s long-term issuer default and medium-term note programme on a 'rating watch negative.'
A rating-watch-negative action means that the rating of the company will be reviewed for downgrade or to keep unchanged upon the resolution of the watch., which is typically up to six months.
The development came after the Reserve Bank of India directed the non-bank lender to put a halt on new gold-backed lending and related off-balance-sheet funding transactions.
"Fitch will use the Watch period... to gather information on the remediation process and the company's broader performance following this event," the credit ratings agency said in a statement on Thursday.
The move by Fitch reflects the downside risks to IIFL Finance's franchise, profitability and overall risk profile in case the RBI's restrictions are prolonged. In the December quarter, gold loans accounted for 32% of the company's assets under management and 18% of gross on-book loans.
"The financial implications of the curbs will depend on the length of the restrictions, balanced against the company's ability to maintain other lending activities, which have not been cited in the ruling," Fitch said.
Non-compliance with environmental, social and governance standards within the company's gold loan business is also a major driver for keeping the ratings watch negative.
Fitch also flagged a possibility of franchise risk beyond the gold-loan portfolio in case repercussions spill over into other product lines, such as housing finance and microfinance. "These are operated by separate subsidiaries with dedicated branch networks, but any contagion effects on funding availability could weigh on growth," it said.
As IIFL Finance earns significant revenue and profit from its gold-loan business, a prolonged halt on new gold loans is likely to dampen portfolio growth and profitability, it said. "We expect the consolidated non-performing asset ratio to face modest upward pressure due to the mix effect if gold loans decline significantly relative to consolidated gross loans."
