top of page

IIFL Finance Ltd – NBFC with diversified retail lending portfolio

Updated: Jun 9, 2022

Company Name – IIFL Finance Limited (IIFL Finance)

Current Share Price – INR 318 (May 23, 2022)

Market Cap – INR 12,075 cr


1. What is interesting about the stock?

I am looking for a lender which can perform two things for me:

  • Give me a loan

  • Then leave me alone

We all can relate to this. Who doesn’t love free money? Quality of loan or recollection is the biggest challenge for any lender. It has been eternal and will continue till the loans are given.

Seeing things from the other side!

Money-lending is probably the oldest form of business in the rural areas of India. Despite the spread of the banking network, the village mahajan or corner jeweler continues to be an indispensable source of credit. Their modus operandi has pre-dominantly been exploitative and nowhere is this more true than in rural areas where interest rates are shockingly high. They are usually aligned along ethnic lines and are variously called shroffs, seths, sahukars, mahajans, chettis, etc. in different parts of the country.

India is a large diverse country that can’t be fully catered to by the banks. NBFCs (Non-Banking Financial Companies) play an important role in promoting inclusive growth, by catering to the diverse financial needs of bank excluded customers. NBFCs do play a critical role in participating in the development of an economy by providing a fillip to transportation, employment generation, wealth creation, bank credit in rural segments, and support for financially weaker sections of the society. IIFL Finance is one such NBFC.

IIFL Finance is the listed holding company of the IIFL Finance group and is registered as a systemically important non-deposit-taking NBFC. Company offers various retail lending products, including gold loans, home loans (including Loan Against Property or LAP), business loans, microfinance, and capital market-based lending (margin funding and loans against shares). It also offers construction and developer finance.

In FY08, IIFL Finance (erstwhile, IIFL Holdings Limited) launched its retail finance business through the NBFC, Moneyline Credit, which was merged with India Infoline Finance. In FY09, India Infoline Housing Finance received registration as a housing finance company from the National Housing Bank and was subsequently renamed IIFL Home. In FY17, IIFL Finance ventured into microfinance after the acquisition of microlender, Samasta Microfinance.

In January 2018, IIFL Finance announced plans to reorganize its corporate structure and list IIFL Finance (loans and mortgages business), IIFL Wealth Management (wealth and asset management business), and IIFL Securities (capital markets and other businesses). As part of the restructuring scheme, IIFL Wealth Management and IIFL Securities were demerged from IIFL Finance in May 2019 and were listed in September 2019. In March 2020, India Infoline Finance was merged into IIFL Finance, the listed entity of the lending business.

The loan book of the Company is divided into two segments:

  • On-book Assets Under Management (AUM): Loan book of INR 31,671 cr, as of March 31, 2022, is on the Company balance sheet; grown by ~INR 1,900 cr in FY22 or ~6%.

  • Off-book AUM: Loan book of INR 19,539 cr as of March 31, 2022; grown by ~ INR 4,635 cr in FY22 or ~31%. Company takes the loan off-book in three ways:

    • Securitization: IIFL sells the book to a bank or other lenders at a lower rate (vs assignment) as it provides a first clause guarantee. A margin of 5% is provided to the bank by way of a fixed deposit. IIFL Finance has to keep the loan book on its balance sheet for at least 6 months. IIFL Finance earns the difference between the book interest paid by the customer and the bank. Example: IIFL Finance sells a home loan book to a bank at 7.5%. The average yield on this home loan book is 10% (interest paid by the customers) so the interest earned by IIFL Finance is 10% – 7.5% or 2.5%

    • Assignment: Complete sale of the book with the full risk being passed to the lender. IIFL Finance earns the difference between the book interest paid by the customer and the bank. Example: In the same home loan book as above, IIFL Finance sells to a bank at 8.5% (higher due to risk being taken by the bank). The interest earned by IIFL Finance is 10% – 8.5% or 1.5%

    • Co-lending: Co-lending is a set-up where banks and non-banks enter into an arrangement for the joint contribution of credit for priority sector lending. To put it simply, under this arrangement, both banks and NBFCs share the risk in a ratio of 80:20 (80 percent of the loan with the bank and a minimum of 20 percent with the non-banks). The primary aim of co-lending is to improve the flow of credit to the unserved and underserved segment of the economy at an affordable cost. This happens as banks have lower costs of funds and NBFCs have greater reach. On the 80% of the loan sold to the bank, IIFL Finance will earn a difference in interest similar to an assignment transaction. Currently, this is around 1.5-2%

The quality of the on-book AUM could be lower after co-lending and securitization/assignment to banks as they typically have higher asset quality benchmarks to provide credit. This is borne out by the numbers on the home loan side where the GNPA for on-book AUM is 1.8% vs GNPA on whole AUM at 1.3% (1% for salaried and 1.9% for non-salaried; salaried to non-salaried mix being at 62:38) in FY22.

Company operates in the following segments:

Home Loan has a low portfolio yield (interest rate) but also lower NPA ratios. The gold loan has a higher portfolio yield with lower NPA ratios but needs to have higher operating costs due to the large branch network and lower ticket size. Micro-finance is similar to the gold loan business – large network and lower ticket size. RoE for the microfinance business is ~4% which is significantly lower than the other segments.

As of March 2022, promoters held a 24.91% stake in IIFL Finance, while 22.30% is held by Prem Watsa-owned Fairfax Holdings and 7.77% by CDC Group.

Future Prospects

Management expects ~25% growth in the income for the next 2-3 years which is driven by an increasing share of off-book (predominantly by co-lending). The current share of off-book to AUM (off-book + on-book) ratio is 38% which is expected to rise to more than 40% in the next 12-18 months. As the Company would be growing off-book, it will require to raise lesser equity capital which is a perennial challenge for any lender to maintain capital adequacy ratios.

IIFL Finance expects the Gross NPA (GNPA) to come down from 3.2% to 1.5%. Company added 800 branches in FY22 but will slow down and add ~ 250 branches in FY23 as it looks to consolidate newly opened branches (18-24 months are needed to break even a new branch).

Management Background

Nirmal Jain is the founder and Chairman of the Company. He holds a PGDM (Post Graduate Diploma in Management) from IIM Ahmedabad and is a Chartered Accountant and a Cost Accountant.

R. Venkataraman is the Co-Promoter and Managing Director of the Company. He holds a PGDM from IIM Bangalore and Bachelor in Electronics and Electrical Communications Engineering from IIT Kharagpur.

Strengths (Why invest in IIFL Finance?)

  • Diversified retail lending portfolio with an extensive branch network

  • Unique business model with large off-book AUM

  • Experienced management and marquee investors


  • No clear and defendable moat – high competition in all segments

  • Gross NPA level increasing: 1.74% in FY19; 2.04% in FY20; 1.98% in FY21; 3.15% in FY22 (2.30% is comparable to previous years and 0.85% is one-off due to RBI circular)

2. Key Historical Financials

  • FY19 and FY20 results aren’t relevant due to business reorganization

  • Revenue is growing at 17-20% in FY21 and FY22 on a YoY basis

    • Growth is mainly coming from non-fund based income (owing to higher off-book AUM)

    • Rising portfolio yield due to change in the business mix (increase in the share of micro-finance)

  • Net profit increased by 56% in FY22 on a YoY basis is due to higher NIM and lower provisions

  • ROA/ROE at 2.7% and 20% in FY22 – quite healthy

  • Capital adequacy ratio at 23.9% as of March 31, 2022, vs regulatory requirement of 10%

3. What is my view on company valuation?

Company share price has increased 20% in last 1 year vs Nifty 50 index return of ~7%.

IIFL Finance trades at P/BV of 1.9x vs Muthoot Finance at 2.9x, Chola at 4.6x, Shriram Transport Finance (STF) at 1.2x, Mahindra & Mahindra Financial Services (MMFS) at 1.3x and Bajaj Finance at 8x.

On P/E (TTM) ratio, IIFL Finance trades at 10x vs Muthoot Finance at 12x, Chola at 25x, STF at 11x. MMFS at 19x and Bajaj Finance at 50x.

Company looks interesting at the valuation level but the lack of a moat and increasing NPA level make the business less promising.

4. What are the risks to the investment analysis?

Risks to the analysis are:

  • Management is competent and has a history of creating value in IIFL Wealth

  • Limited seasoning – Company has entered into new segments and newer off-book arrangements which haven’t seen a complete cycle. Company’s ability to control asset quality in a complete cycle is yet to be tested

  • COVID-19 – Long term impact of COVID-19 related lockdowns could be felt in the next couple of years


About the Author

I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.

I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).

I am an Insignificant Investor in the public market and co-founder of SocInvest.


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.



bottom of page