Bajaj Finance Ltd Management Discussions.

Bajaj Finance Ltd. (‘BFL, ‘Bajaj Finance, or ‘the Company) is a deposit-taking Non-Banking Financial Company (NBFC-D) registered with the Reserve Bank of India (RBI). It is a subsidiary of Bajaj Finserv Ltd. and is engaged in the business of lending.

BFL has a diversified lending portfolio across retail, SME and commercial customers with a significant presence in urban and rural India. It accepts public and corporate deposits and offers a variety of financial services products to its customers. It has two 100% subsidiaries: (i) Bajaj Housing Finance Ltd. (‘BHFL or ‘Bajaj Housing), which is registered with National Housing Bank as a Housing Finance Company (HFC); and (ii) Bajaj Financial Securities Ltd. (‘Bfinsec), which is registered with the Securities and Exchange Board of India (SEBI). BHFL started its business in the financial year 2017-18 (FY2018). Bfinsec is yet to start its operations.

Macroeconomic overview

Financial year 2018-19 (FY2019) began with an expectation of higher growth as the economy seemed to have overcome the teething troubles of the nation-wide roll out of the Goods and Services Tax (GST). However, a rise in the current account deficit (CAD), concerns relating to rising non-performing assets (NPAs) and decline in liquidity coupled with hardening interest rates contributed to uncertainties around a higher GDP growth rate.

The second advance estimates of national income for FY2019 released by the Central Statistics Office (CSO) on 28 February 2019 showed that the economy could not continue the expected growth momentum. GDP growth in the third quarter of FY2019 reduced to 6.6% after clocking 8% and 7% growth in the first and second quarter of FY2019 respectively. The CSO estimates GDP growth in FY2019 at 7% compared to 7.2% in FY2018.

Gross fixed capital formation (GFCF) provided a pleasant surprise, with the share of GFCF to GDP growing to 32.3% in FY2019 (second advance estimates) versus 31.4% in FY2018 (first revised estimates). However, it is perhaps too early to expect this recent uptick in the share of GFCF to GDP to provide a definite impetus to growth.

Table 1 gives the data on real GDP and gross value added (GVA) growth over the last four financial years.

Table 1: Growth in Real GDP and GVA, India

FY2016 FY2017 FY2018 FY2019 (E)
Real GDP growth 8.2% 7.1% 7.2% 7.0%
Real GVA growth 8.1% 7.1% 6.9% 6.8%
Source: Government of India, CSO. (E) denotes estimate.

On the back of a widening trade deficit, the CAD increased to 2.6% of GDP during April-December 2018 — up from 1.8% in April-December 2017. There was a net outflow of USD 17.5 billion of foreign currency reserves in April-December 2018 versus a net inflow of USD 30.3 billion over the same period a year earlier.

The good news was inflation. During the second half of FY2019, the consumer price index (CPI) steadfastly remained below the RBIs medium-term target of 4%, reaching a 19-month low of 1.9% in January 2019. It picked up marginally in February to 2.6%, albeit supported by a weak base and uptick in prices of some food categories. The RBI has projected headline inflation to remain soft in the near term: 2.4% in Q4 FY2019, 2.9% to 3% in H1 FY2020, and 3.5% to 3.8% in H2 FY2020. It did, however, acknowledge the monsoon risk from El Nio conditions and highlighted uncertainties in oil price movement.

Clearly, at this point, the RBI does not see inflation as a material risk. This has been underscored by the majority of the members of the RBIs Monetary Policy Committee (MPC) — when they recommended two successive cuts of 25 bps each in the policy rates and also maintained a neutral monetary stance.

While gross NPAs of scheduled commercial banks declined from 11.5% in March 2018 to 10.8% in September 2018, thus putting out hope of an orderly resolution, the Supreme Court intervened and created uncertainties. Its recent decision, setting aside the RBIs circular of 12 February 2018 to replace several existing restructuring schemes by a formal process under the Indian Bankruptcy Code, has resulted in considerable ambiguity regarding NPA resolutions. The RBI has issued a statement that it will take necessary steps, including issuing a revised circular, as may be necessary, for expeditious and effective resolution of stressed assets. Until such a circular is issued, the classification of NPAs and provisioning requirements would be left to individual banks — thus accentuating an already deep malaise.

Systemic liquidity swung between surplus and deficit during FY2019, with the RBI needing to intervene to smoothen liquidity flows. This liquidity stress was compounded thanks to major debt defaults of a systemically important NBFC. The default resulted in a virtual drying up of the money markets; and access to funds for borrowers such as NBFCs and HFCs were deeply impacted. The consequent increase in interest rates for fresh borrowings in Q3 FY2019 resulted in business disruptions. While H2 FY2019 has been an extremely challenging period for both NBFCs and HFCs, these disruptions have not yet completely settled.

Banking credit continued to post double-digit growth, registering 14.1% increase on-year as of 15 March 2019. However, this growth was still not broad-based. Industrial credit growth continued to remain anaemic, while the service sector and the retail segment saw fairly strong growth in bank credit. However, the healthy credit growth from banks to non-banks was largely nullified by money markets refraining from lending to NBFCs and HFCs during Q3 FY2019.

In this challenging environment for NBFCs, BFL signed off FY2019 with a 41% growth in consolidated assets under management (AUM) and a 60% growth in consolidated profits. BFLs cost of fund increased only by about 5 bps in FY2019 over FY2018.

Despite such excellent outcomes, we at BFL believe that FY2020 may be a challenging year. Our views are based on four factors:

(a) Recent increases in international crude prices;

(b) Some high frequency indicators — such as growth in manufacturing and capital goods, the Index of Industrial Production, auto sales — suggest a significant moderation in activity, amid a slowing global economy; (c) The possibility of El Nio and its risk to food prices; and (d) Budgetary and political announcements such as basic minimum income support for the poor, if implemented across-the-board, could result in higher fiscal deficit and inflation.

Having stated our concerns, it should also be stated that, with a large customer franchise, strong liquidity position, diversified portfolio mix, granular geographical distribution and robust risk metrics, we at BFL are confident of successfully dealing with these challenges in FY2020.

Industry overview

NBFCs continued to grow their share in the financial services industry. Data published by the RBI in its Financial Stability Report dated 31 December 2018 show that NBFCs have outperformed scheduled commercial banks (SCBs) on growth in advances, asset quality and profitability. This growth momentum of NBFCs should result in their share in the financial services sector increasing in the near future. Table 2 gives the data.

Table 2: Comparison of growth in advances, asset quality and profitability of NBFCs and SCBs

31 March 2018

30 September 2018

Particulars NBFCs SCBs NBFCs SCBs
Growth in Advances 19.2% 10.4% 16.3% 13.1%
Gross Non-Performing Assets 5.8% 11.6% 6.1% 10.8%
Net Non-Performing Assets 3.8% 6.1% 3.1% 5.3%
Return on Assets (ROA) 1.7% (0.2%) 1.8% 0.0%
Return on Equity (ROE) 7.5% (1.9%) 4.4% (0.04%)
Source: Financial Stability Report of RBI dated 26 June 2018 and 31 December 2018.

The Company

BFL enjoyed yet another strong year of performance aided by a diversified product mix, robust volume growth, prudent operating costs and effective risk management. With a consolidated AUM of RS 115,888 crore and a standalone AUM of H 98,671 crore, BFL has emerged as one of the leading diversified NBFCs in the country today.

BFL has adopted the Indian Accounting Standards (Ind AS) for FY2019. This involves giving Ind AS compliant comparatives for FY2018 and as at 1 April 2017 — the last being the date of transition. Accordingly, figures for previous years/periods, have been recast and audited by statutory auditors as per the new accounting standards. Highlights of FY2019 are as follows:

Consolidated performance highlights, FY2019

l New loans booked increased by 53% to 23.50 million. l Customer franchise grew by 32% to 34.48 million. l Assets under management (AUM) grew by 41% to RS 115,888 crore. l Total income grew by 45% to RS 18,502 crore. l Net interest income grew by 46% to RS 11,878 crore. l Total operating cost rose by 28% to H 4,198 crore. l Total operating cost to net interest income improved to 35% from 40% in FY2018. l Impairment on financial instruments was RS 1,501 crore. At 0.63%, BFLs consolidated net NPA was amongst the lowest in the NBFC industry. l Profit before tax increased by 61% to RS 6,179 crore. l Profit after tax grew by 60% to H 3,995 crore. l As on 31 March 2019, standalone capital adequacy was 20.66%, which is well above the RBI norms. Tier I adequacy was 16.27%.

BFL focuses on six broad categories: (i) consumer lending, (ii) SME lending, (iii) commercial lending, (iv) rural lending, (v) deposits and (vi) partnerships and services.

BFL is present in 1,830 locations across the country, including 903 locations in rural/smaller towns and villages.

BFLs loan book continued to remain strong as a result of its deeply embedded risk culture and robust risk management practices. The Companys consolidated net NPA at 0.63% is amongst the lowest in the NBFC industry.

BFL continued to prudently manage its asset liability management (ALM) with a strategy of raising long-term debts and maintaining a judicious mix of borrowings between banks, money markets and deposits. BFL continues to closely monitor liquidity in the market; and as a part of its ALCO strategy maintains a liquidity buffer to prudently manage liquidity risk. In fact, this enabled BFL to deftly overcome the severe liquidity crisis and volatile interest rates in Q3 FY2019 because of a major debt repayment default by a systemically important NBFC. Consequently, the increase in cost of funds for FY2019 over FY2018 was only 5 bps.

As on 31 March 2019, consolidated borrowings stood at RS 101,588 crore.

Assets Under Management (AUM): A Snapshot

Chart A depicts standalone AUM over the last five years. Chart B depicts the consolidated AUM.

Chart A: BFLs standalone AUM (J In Crore)

Table 3 breaks down the AUM across the major business verticals.

Table 3: Assets Under Management

(Rs In Crore)


Particulars FY2019 FY2018 Change FY2019 FY2018 Change
Consumer B2B –
auto finance business 9,726 6,290 55% 9,726 6,290 55%
Consumer B2B - sales finance 12,261 9,252 33% 12,261 9,252 33%
Consumer B2C businesses 22,551 15,286 48% 23,002 15,402 49%
SME lending 15,678 11,425 37% 15,759 11,434 38%
Rural B2B – sales finance 2,142 1,281 67% 2,142 1,281 67%
Rural B2C businesses 7,101 4,177 70% 7,101 4,177 70%
Commercial lending 5,668 4,152 37% 5,668 4,152 37%
Loans against securities 6,359 6,790 (6%) 6,359 6,790 (6%)
Mortgages 17,185 20,199 (15%) 33,870 23,644 43%
Total 98,671 78,852 25% 1,15,888 82,422 41%

Business update

Consumer Lending

BFL continued to be the dominant consumer durables, furniture and digital products lender in India in FY2019.

l BFL financed 12.7 million consumer durable and digital products purchases in FY2019 against 9.9 million in the previous year, a growth of 29%.

l BFLs unique Existing Member Identification (EMI) card, with over 18.5 million cards in operation, enables customers to avail instant finance after the first purchase. In FY2019, EMI card enabled BFL to finance over 11.5 million purchases, across all sales finance categories, viz. consumer durables, digital products, lifestyle products, lifecare, e-commerce and other retail spends versus 6.75 million in FY2018, a growth of 70%.

BFL was the largest financier of Bajaj Auto motorcycles and three-wheelers in FY2019. l BFL crossed a milestone of financing 1 million number of motorcycles in FY2019. l Gross deployments in FY2019 were H 8,271 crore — a growth of 55% over the previous year. l Financed over 40% of Bajaj motorcycles and some 36% of Bajaj three-wheelers in FY2019.

BFLs lifestyle finance business financed approximately 481,000 transactions, which represented a growth of 52% over FY2018. As part of its product expansion strategy, the Company extended its offerings in the health care segment for elective and non-elective procedures in FY2018. This initiative has resulted in health care offerings contributing over 19% of lifestyle finance business. To further the health care financing business and facilitate hassle free processing of loans to customers, BFL has recently introduced a ‘Healthcare EMI Card.

E-commerce consumer finance addresses the financing needs of BFL customers shopping online with major e-commerce players. During FY2019, BFL also expanded this offering to the online travel segment which is growing rapidly. BFL executed over 2,105,000 transactions in FY2019 compared to 702,000 in FY2018 — representing a threefold increase in volume.

The retail spends financing business offers easy instalment options to customers for small ticket purchases like fashion, travel, insurance and small appliances. The business is operational in 50 locations with a footprint of over 17,000 partner stores across India. BFL financed more than 1,460,000 purchases in FY2019 compared to 712,000 in FY2018 — representing a twofold increase in volume.

Personal loans cross-sell (PLCS) and salaried personal loans (SPL) AUM grew by 56% and 36%, respectively, over FY2018; to RS 13,868 crore and H 8,683 crore.

l PLCS business was fuelled by growing customer franchise, investment in the effective use of advanced analytical capabilities, robust risk management and customer-centric loan processing capabilities.

l Initiatives to grow these businesses revolved around creating online facilities for customers and mobile based applications for sales officers to transform leads into approval.

SME Lending

SME lending offers secured and unsecured loans to its customers. Unsecured lending is done through two product offerings: (i) business loans to small and medium enterprises and to the self-employed, and (ii) professional loans.

l Business loans AUM grew by 21% over FY2018 to RS 10,094 crore. This offering is present in over 650 locations — which helps BFL to diversify portfolio concentration risk beyond intensely competitive markets and deliver a lower cost of loan acquisition.

l Professional loans AUM grew by 73% over FY2018 to H 5,284 crore, enabled by a ‘Direct to Customer (D2C) initiative, analytics-based eligibility and robust risk assessment. Professional loans portfolio contributed to 34% of unsecured SME lending and continues to deliver robust results.

BFL has launched two new products in the SME lending business in FY2019, namely used car financing and secured enterprise loans.

l Used car financing: BFL offers both refinancing and purchase financing of used cars under this business. Gross deployments in FY2019 were H 300 crore.

l Secured enterprise loans: Under this business, BFL offers small ticket loans of around RS 10 lakh against mortgage of self-occupied residential and commercial property in smaller towns. Gross deployments in FY2019 were H 316 crore, with a closing AUM of H 300 crore.

This segment is expected to contribute significantly to SME lending growth over the next few years.

Secured lending comprises of loan against property, home loans, lease rental discounting and developer financing. Since February 2018, incremental business of secured lending has been done through BFLs 100% subsidiary, Bajaj Housing Finance Ltd. (BHFL).

Rural Lending

This business caters to financial services need of rural consumers. In FY2019, BFL expanded its rural footprint by setting up branches in two new states and penetrating deeper in the existing states. At the end of FY2019, it was present in 903 locations across 13 states and union territories in India. The business had an AUM of H 9,243 crore as on 31 March 2019 — up by 69% from H 5,458 crore a year earlier.

BFLs rural business has also started offering fixed deposit schemes from February 2019. This will further widen BFLs product offerings to rural customers and expand its retail liabilities business.

Commercial Lending

Commercial lending comprises of six products: loan against securities, loans to financial institution group lending, warehouse receipt financing, working and growth capital loans to auto component manufacturers, loans to light engineering industry and loans to speciality chemical industry verticals. Commercial lending business closed FY2019 with an AUM of RS 12,026 crore. BFL decided to wind down its warehouse receipt financing business from April 2019 given the stress witnessed in the agrarian sector and the lack of a sustainable profit model.


At the end of FY2019, BFL had a deposit book of RS 13,193 crore, representing a growth of 69% compared to the end of FY2018. The deposit books contribution to BFLs standalone borrowing was 15% against 12% as at the end of FY2018. To grow the retail and high networth individuals (HNI) deposits, BFL has set up seven wealth management branches on pilot basis in Pune in March 2019.

Partnerships and Services

In partnership with various financial service providers, BFL offers the following products to its customers: life insurance, health insurance, extended warranty, comprehensive asset care, co-branded credit card, co-branded wallets and financial fitness reports.

BFLs co-branded credit cards business in partnership with RBL Bank continued to grow strongly in FY2019. The number of cards-in-force stood at over one million as on 31 March 2019.

BFL continued to grow its co-branded wallet business by providing EMI cards to its customer in digital format. It launched Indias first H 5K and RS 10K loan on its co-branded wallet and has disbursed over 242,000 loans in FY2019.

Financial performance

Table 4 gives BFLs standalone financial performance for FY2019 vis--vis FY2018.

Table 4: Standalone Financials

( Rs In Crore)
Particular FY2019 FY2018 Change
Total income 17,401 12,650 38%
Finance costs 5,939 4,567 30%
Net interest income (NII) 11,462 8,083 42%
Employee benefits expenses 1,721 1,415 22%
Depreciation and amortisation expenses 137 102 35%
Other expenses 2,093 1,709 22%
Pre-provisioning operating profit 7,511 4,857 55%
Impairment on financial instruments 1,476 1,026 44%
Profit before tax (PBT) 6,035 3,831 58%
Profit after tax (PAT) 3,890 2,485 57%
Other comprehensive income/(expenses) 2 (18) 110%
Total comprehensive income 3,892 2,467 58%
Earnings per share (EPS) basic, in H 67.52 44.16 53%
Earnings per share (EPS) diluted, in H 66.95 43.71 53%
Book value per share, in H 339.09 275.27 23%