Retail loan market to grow at 18% in 3 years: Nirmal Jain

IIFL Finance Limited recently picked up 2,200 crore from Abu Dhabi Investment Authority (ADIA) for its housing finance business. Mumbai-based IIFL Group’s NBFC business is confident of a Compound Annual Growth Rate (CAGR) of 25% in the coming years as it targets housing finance, gold loans and partnerships with fintech and neo-banks, said Nirmal Jain, Founder he said. Managing Director of IIFL Group and IIFL Finance. Edited excerpts from an interview.

You have outlined a plan to grow your company’s bottom line to 2,500 crore till FY25. How do you plan to achieve this in an environment where interest rates have gone up substantially?

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

As far as profit targeting is concerned, we have been able to pass on higher interest rates across most of our loan products. Our customers are less sensitive to interest rate hikes in a narrow range of 1-2% across sectors, be it gold loans, small business loans or affordable home loans.

With the slowdown in the pace of branch expansion, we will start achieving economies of scale, which will help reduce the cost-to-income ratio. Historically, our cost-to-income ratio was approximately 35%, but has increased to 43% since the recent expansion. I am confident that we will be able to bring it back to those levels in the next 2-3 years. With a debt asset CAGR of 25% and economies of scale, we aim to 2,500 crore profit can be achieved by 2025.

How important is home loan portfolio in your FY25 goals?

This is the most important part of our strategy and is expected to contribute approximately 50% of our targeted net profit by FY25. ADIA Equity Capital has strengthened our balance sheet, which has increased our credibility with lenders and will help us upgrade our ratings. Our Focus Market Segment of Home Loans, Approx. 1.5 million, is growing rapidly and is relatively less competitive. The new players are focusing on sub- 10 lakh loans, and established banks and old housing finance firms are focusing on higher value of loans. The Sweet Spot we operate targets people with an annual income 6-8 lakh more houses 20-25 lakhs.

Are rising interest rates causing a drop in demand for loans?

Home loan demand depends on three factors-interest rates, income level and home prices. While the interest rate for housing loan demand is rising unfavorably, 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. In addition, housing prices in nominal terms have risen much slower than income levels for 20 years. Builders are being regulated by the Real Estate Regulatory Authority and they are not getting funds for holding projects for a long time. Hence, they have kept the prices under control and are offering discounts to move the inventory. As a combined effect of all these factors, we expect strong demand for housing.

What has been the impact of COVID related stress on your loan portfolio?

There was some Covid-related stress in our construction and real estate, microfinance and business loan portfolios. IIFL’s corporate book has declined as we are not giving incremental fresh loans. Microfinance and business loans have also recovered. During COVID, we took a significant hit on the bottom line and made substantial provisions for COVID-related stress. The rising interest rate scenario is not a cause for concern.

Looking to exit your corporate book with your focus on retail?

We don’t need to put any extra effort to get out of 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, especially for green housing projects, where we have an advantage as the preferred lender for home loans to the end-user. These loans are of smaller size and carry less risk. We have not done any promoter funding, so our corporate book is likely to be less than 5% of the total book.

How important is the Gold Loan segment?

In recent times, gold loans have seen intense competition as many new NBFCs, fintechs and small banks are lending at rates that are loss-making, either due to inexperience or as an aggressive customer acquisition strategy. However, in view of our goodwill and trust with the customers, we do not resort to short term teasers. We never compromise on our values. Many new competitors are misled to believe that gold loan is a low-risk and high-margin business. But they don’t realize that there is a significant operating cost involved with the responsibility of keeping gold safe. Operating cost is 6-8% of the loan asset. So, despite the seemingly high net interest margin, you don’t make a lot of return on the asset.