IIFL Finance's Earnings May Be Capped By Weak Loan Quality, Narrower Interest Spreads: Fitch

IIFL Finance Ltd.'s near-term performance will be constrained led by weakening loan quality and narrower interest spreads, Fitch Ratings said in a report.

This could pose risks to the non-banking financial company's ratings, when combined with reduced liquidity coverage of near-term debt maturities.

Based on the April-December performance of IIFL Finance, the rating agency expects asset quality and earnings could face headwinds, going forward.

After the Reserve Bank of India lifted restrictions on its gold loan business in October, assets under management of the company rebounded by 7% to Rs 71,400 crore in the December quarter, providing a higher base for interest earnings.

The rating agency expects the company's full-year earnings to be significantly lower in the current financial year, as compared with the previous year because of lower net interest margins and higher credit costs.

"Fitch has flagged that pretax profit/average assets sustained below 1.5% could place negative pressure on the ratings (FY24: 4.5%; 9MFY25 annualised: 0.8%). A tax investigation could also present additional tax liabilities, depending on the findings," the rating agency said.

The company’s latest figures also underscore the extent of credit deterioration in microfinance and other unsecured loans. Although, the aggregate non-performing loan ratio remained adequately contained at 2.4%, against 2.3% in 2023-24 (Apr-Mar), Fitch said.

Worsening gross NPA ratio in the MFI and unsecured micro, small and medium enterprises loans is important to note, as these two segments were around 26% of gross loans, but close to half of total NPAs.

While IIFL Finance's performance mirrors weakness in MFI and other unsecured segments across the system in recent months, MFI delinquencies and credit costs have risen across the larger market participants tracked by Fitch.

Even funding volumes at IIFL Finance have picked up to be more in line with what they were before the RBI's restrictions in March 2024. Liquid asset pool has improved from the lows in July-September, but short-term liquidity coverage still remains constrained.

This partly reflects increased short-term maturities due to greater usage of shorter-tenor funding, such as commercial paper, in recent months, according to Fitch. This continues to pose refinancing risks in the event of market liquidity shocks.

This could be a negative drag on the company's rating, led by persistent low liquidity buffers of less than three months of upcoming debt maturities.

"Prolonged underperformance on this metric would place downward pressure on the rating, particularly if asset quality and earnings come under further strain," the rating agency said.