Retail credit market grows by 18% in 3 years: Nirmal Jain

Nirmal Jain, founder of IIFL Group

IIFL Finance Ltd recently raised ₹2,200 crore from the Abu Dhabi Investment Authority (ADIA) for its housing financing business. The NBFC business of the Mumbai-based IIFL group is confident of a compound annual growth rate (CAGR) of 25% in the coming years as it focuses on housing finance, gold lending and partnerships with fintechs and neo-banks, Nirmal Jain said. , founder of IIFL Group and CEO of IIFL Finance. Edited excerpts from an interview.

You have outlined a plan to grow your company’s profits to ₹2,500 crore in FY25. How do you plan to achieve this in an environment where interest rates have risen significantly?

In this fiscal year we have grown our loan portfolio at a CAGR of 25% per quarter, this may fluctuate a bit, but we are confident that we will also have an average of 25% CAGR in our loan portfolio over the next three years. The retail credit market will grow at 15-18% per annum over the next three years and IIFL Finance could grow slightly faster. This is because we have improved our branch network and manpower by more than 40% in the last 18 months. Our nationwide phygital network and best-in-class digital capabilities will help improve efficiency and productivity.

In terms of profit target, we were able to pass on higher interest rates on most of our loan products. Our customers in various segments, be it gold loans, small business loans or affordable home loans, are less sensitive to interest rate increases within a narrow range of 1-2%.

With the slowdown in the pace of site expansion, we will begin to achieve economies of scale, which will help to lower the cost/income ratio. Historically, our cost/income ratio has hovered around 35%, but has risen to 43% after the recent expansion. I think we can get it back to that level in the next 2-3 years. With a CAGR of 25% on loans and economies of scale, our goal of a profit of ₹2,500 crore by 2025 should be achievable.

How important is the home loan portfolio in your FY25 goals?

It is the most important part of our strategy and is likely to contribute close to 50% of our target net profit by FY25. ADIA’s equity has strengthened our balance sheet, which has increased our credibility with lenders and will help us obtain a rating upgrade. Our home loan focus market segment, around ₹15 lakh, is growing rapidly and is relatively less competitive. New players are targeting loans below ₹10 lakh, and established banks and older home finance companies are targeting the significantly higher value of loans. The sweet spot in which we operate focuses on people with an annual income of 6-8 lakh and homes of ₹20-25 lakh.

Are rising interest rates reducing demand for loans?

The demand for home loans depends on three factors: interest rates, income levels and house prices. While interest rates are moving unfavorably for home loan demand, the other two factors are positive. People have seen a significant rise in income levels with economic growth and businesses bouncing back to pre-covid levels. Furthermore, house prices in nominal terms have risen much more slowly than income levels over the past twenty years. Builders are regulated by the real estate regulatory body and will not receive funding if they hold projects for a long time. Therefore, they have kept prices in check and are offering discounts to move the stock. As a combined effect of all these factors, we expect a strong demand for housing.

What is the impact of covid-related stress on your loan portfolio?

There was some covid-related stress in our construction and real estate, microfinance and corporate loan portfolios. IIFL’s business book is declining because we are not making incremental new loans. Microfinance and business loans have also recovered. During covid we took a big hit and made adequate provisions for covid-related stress. The scenario of rising interest rates is not a cause for concern.

Do you want to leave your business book, given your focus on retail?

We don’t have to put in any extra effort to leave the corporate loan book as it will run its course in the next 2-3 years. However, we will continue to fund construction through our housing finance company, particularly for green housing projects where we have an advantage as the preferred lender for home loans to end users. These loans have a smaller ticket size and involve less risk. We haven’t done any promoter funding, so our corporate book will likely stay below 5% of the total book.

How important is the gold lending segment?

In the recent past, gold lending has seen fierce competition as many new NBFCs, fintechs and small banks offer loans at rates that are loss-making, either due to inexperience or as an aggressive customer acquisition strategy. However, given our goodwill and trust with customers, we do not resort to short-term teasers. We never compromise on our values. Many new competitors are misled into believing that gold lending is a low-risk, high-margin business. But they don’t realize that there are significant operating costs involved… with the responsibility of keeping gold safe. Operating expenses are usually 6-8% of loan assets. Therefore, despite a seemingly high net interest margin, you are not making very high returns on assets.

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