Moody's Upgrades IIFL Finance's Rating to B1 from B2; outlook stable

Moody's Investors Service has upgraded IIFL Finance Limited's (IIFL  Finance) long-term corporate family rating to B1 from B2, foreign currency senior secured debt  rating to B1 from B2, and foreign and local currency senior secured medium-term note program  ratings to (P)B1 from (P)B2. 

The rating upgrades are driven by strong momentum from the company's asset-light model that  has improved its proftability, capital and funding. 

The ratings outlook remains stable. 

RATINGS RATIONALE 

IIFL Finance's share of asset-light business or off-balance sheet loans increased to 37% of its  total assets under management (AUM) as of the end of December 2022 from 21% as of the end  of March 2019 (fscal 2019). This transition has improved its funding, proftability and capital. 

The asset-light business is driven by partnerships with banks for loan assignment and co-lending of new loans to retail and small and medium enterprise customers, with the banks providing the  funding and assuming the corresponding asset risk of those loans.  

The transition to an asset-light model has helped improve IIFL Finance' proftability, with the  annualized return on average assets increasing to 3.2% for the 9 months ending December 2022  compared with the average of 2% over fscals 2017-21. While there may be some margin  compression as other fnance companies replicate the asset-light model, Moody's expects IIFL  Finance's proftability to remain higher than historical levels. 

The combination of improved proftability and relatively muted balance sheet growth has helped  improve its capital, with the tangible common equity/total managed assets increasing to 14% as  of the end of March 2022 compared with 13% as of the end of March 2019. The company's  capitalization has improved further, helped by an external capital infusion in IIFL Home Finance  in June 2022.  

The company's asset quality has improved from pandemic lows, with the gross non-performing  loan ratio decreasing to 2.1% as of the end of December 2022 from 3.2% as of the end of March  2022. Moody's expects its asset quality to remain stable over the next 12-18 months, in line with  the broader asset quality trends among Indian banks and fnance companies. At the same time,  the company is structurally more exposed to asset quality risks, given its limited operating scale  and low-income customer segment. 

Liquidity remains a credit weakness, given the relatively low level of liquid assets on its balance  sheet. At the same time, the maturities of its assets and liabilities are well matched, particularly 

in the near-term maturity buckets. The increasing share of home loans will present a challenge  for liquidity management given the long tenor nature of the product.