Home Run and a Bit of Retail

Bajaj Finance, the pioneer in retail lending, has kept NPAs low while expanding its reach and services

Sanjiv Bajaj, Chairman, Bajaj Finance - Photograph by Rachit Goswami Sanjiv Bajaj, Chairman, Bajaj Finance - Photograph by Rachit Goswami

The 2007 decision by Bajaj group Chairman, Rahul Bajaj, to convert the two-wheeler lending subsidiary into a full-fledged non-banking finance company (NBFC) was a turning point in the fortunes of the 94-year-old group. Bajaj Finance Ltd (BFL) was the sole retail lender giving loans to purchase TVs, refrigerators and air conditioners among other things. It built a pool of loyal customers and widened its portfolio to offer loans for smartphones, apparel and groceries over time.

The financial services business today accounts for 73.3 per cent (Rs 3.3 lakh crore) of the Bajaj group's market capitalisation of Rs 4.5 lakh crore.

BFL is deploying 'zero-based budgeting' to reimagine its businesses and functions. It means getting into micro details of every process to enhance customer experience and digital orientation, besides a leaner cost structure. In the last five years, BFL has made significant investments for broadening its presence in payments through EMI card, credit card and wallet offerings. It plans to integrate its sales finance ecosystem with payment operations. The NBFC has been testing its omnichannel strategy of 'online to offline' and 'offline to online' for the last three years, by integrating customers and retailers. The transformation is set to help the company and retailers sell more products and services. It is present in 1,049 urban areas and 1,359 rural areas.

In 10 years of operations, BFL is part of the 30 Sensex scrips. The stock has risen around 100 times between January 2008 and February 2020. Its market value stood at Rs 2.2 lakh crore in the last week August. The holding company, Bajaj Finserv, which also has two insurance firms under it, had a market value of Rs 1.04 lakh crore.

The companys consolidated profit grew 32 per cent to Rs 5,264 crore in 2019/20. Net interest income (NII) was up 42 per cent to Rs 16,913 crore. Operating expense to NII stood at 33.5 per cent, against 35.3 per cent in 2018/19. In the first quarter of FY2021, assets under management (AUM) grew 7 per cent to Rs 1,38,055 crore. BFL had consolidated liquidity buffer of Rs 20,590 crore and SLR investments of Rs 2,550 crore, which represent 19.2 per cent of its total borrowing. Given the environment, the company will continue to run high liquidity buffer, despite an impact on cost of funds in the short term, BFL said.

However, BFL is today at the crossroads. Just before the coronavirus outbreak, it lost its guiding force Nanoo Pamnani, former CEO of Citibank India, who built the business along with Sanjiv Bajaj, the younger son of Rahul Bajaj, and Managing Director Rajeev Jain. The pandemic challenged BFL's lending bandwidth and loan recovery potential. It provisioned Rs 2,350 crore as contingency in the last two quarters. In his letter to shareholders in the 2020 annual report, Rahul Bajaj said: "There is no doubt that business will be difficult in the first half of the year - especially so in the first quarter with April 2020 being fully under lockdown. However, your management believes that things may pick up in the second half. In any event, it has sufficient surplus liquidity to deal with the crisis."

The company prepared different contingency plans to come out of the crisis unhurt, so investors have not been hit. The stock rose 83 per cent to Rs 3,463 in the last three months until August 24. At a time when State Bank of India's shares are trading at half of their pre-lockdown value, BFL is 28 per cent less compared to its peak. According to Rahul Bajaj, the management is using "this grave situation to cut operational costs, while improving efficiency and IT infrastructure for faster delivery."

BFL has remained focused on building a dominant and profitable financial services business, says Rajeev Jain. The firm has an exciting strategic plan for the next three-four years, he adds. "We have been able to navigate well for two reasons: we focused on retail and SME and managed risk well," Jain had said earlier.

It was Pamnani, who spotted the talent in Jain. Pamnani was roped in by Rahul Bajaj to guide Sanjiv. The NBFC has been agile under the leadership trio of Pamnani, Sanjiv Bajaj and Jain. They spotted opportunities in retail segments, and shut down unsuccessful businesses such as infrastructure lending early. Pamnani was the brother-in-law of Rahul Bajaj's late wife Rupa Bajaj.

BFL is betting big on using consumer insights. "Earlier, the customer needed to apply for a loan and wait for approval. The bank took time to dispatch the card. We simplified the process and made purchases simpler. It reduced cost and improved chances of doing more business with the same customer. The revenue per customer has gone up," Jain had said in an earlier interview.

Over the next few years, BFL will target the financial services wallet, including payments, loans, insurance and mutual funds. Its share of the retail lending market is around 3 per cent, and the company aims to take it to 8-10 per cent in the next few years.