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Can Bajaj Finserv still dominate the credit game?

Sanjiv Bajaj, chairman and managing director, Bajaj Finserv. He remains unfazed by the growing competition and believes that there is enough room for everyone.
Sanjiv Bajaj, chairman and managing director, Bajaj Finserv. He remains unfazed by the growing competition and believes that there is enough room for everyone.

Summary

The going is good but the company has to survive an impending onslaught from Jio Financial Services

Mumbai: Sometime in 2008, a team from financier Bajaj Finserv was at a consumer durables store when a family of four walked in. They wanted to buy a 32-inch television on loan but were told it would take at least three days. The Bajaj team wondered why the loan could not be processed the same day so that the family could take the TV home by evening. That’s when the (then) new kid on the block decided to disrupt the appliance and consumer electronics market.

Soon, Bajaj Finserv, which was born out of the 2007 demerger of Bajaj Auto, began reaching out to manufacturers such as LG, Samsung and others to explain its new proposition. It tried to get these companies, which spent millions on advertising, to spend some money on a finance scheme so that consumers could buy products at zero interest. Eventually, they agreed. “Our team managed to crack Samsung first, and once that happened, everybody else came on board within a year," recalls Sanjiv Bajaj, chairman and managing director, Bajaj Finserv.

The availability of customer credit scores from credit information companies and the proliferation of large-format stores in metros aided Bajaj’s push for quicker loans. The company soon realized that 40% of its customers were upgrading to higher value products rather than what they had initially planned to purchase, giving it more headroom for growth.

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Graphic: Mint

Stellar growth

Bajaj Finserv is the financial services arm of the $107.6 billion Bajaj group. It acts as the holding company for consumer durables financier Bajaj Finance, two insurance ventures, a digital marketplace, a healthcare solutions provider, a mutual fund, and an alternate investment venture.

In 2007-08, Bajaj Finance, which accounts for a majority of Bajaj Finserv’s consolidated profit, started off with a loan book of 2,478 crore and 800,000 customers. By the end of 2022-23, the company had a loan book of 2.5 trillion and 69 million customers—at a compound annual growth rate (CAGR) of 36% and 35%, respectively.

Sanjiv Bajaj attributes this growth to factors such as the company’s ability to adopt technologies such as cloud computing way back in 2007-2008 when most were still on the fence.

Bajaj Finserv and Bajaj Finance are now building a digital strategy, which some see as arriving late to the party, since most banks are recording about 95% of their transactions either on the web or on their apps.

The company wants to sync user experiences on Bajaj’s web and app platforms and began the exercise two years back. The Bajaj Finserv app has a net user base of 40.2 million.

“What technology allowed you to do on a phone was different versus on a computer screen, but that changed over a period of time and we realized that the smarter companies were creating a common look and feel, whether you were on the app or the web,"says Bajaj.

Bajaj is especially pushing two of its digital platforms to stay relevant. Bajaj Finserv Health is a health management platform that allows users to look at hospitalization, diagnostics and doctor consultation, while Bajaj Finserv Direct is a financial services marketplace. Bajaj Finserv wholly owns Finserv Health and 80.13% of Finserv Direct.

Industry watchers appear to be quite excited about the digital strides the group is taking. After Bajaj Finance’s June quarter results, analysts at Motilal Oswal said that customer acquisitions and the new loan trajectory have been strong and the momentum will only get stronger, with the digital ecosystem—app, web platform and full-stack payment offerings—in place. To be sure, Bajaj Finserv deserves credit for the steady manner in which it has expanded its interests and grown over the last decade and a half. However, it will struggle to sustain that growth in the coming years in the face of intense competition from banks, non-banking financial companies (NBFCs) and fintechs, not to mention the impending entry of Jio Financial Services.

The driving force

While Bajaj himself is credited with the vision to grow the business, building on his experience of streamlining businesses at the unsplit auto company, Bajaj Finance managing director Rajeev Jain has been the driving force behind its execution.

An early riser, Jain starts his day by sifting through the Financial Times and The Wall Street Journal, sending news clippings to his deputies. He walks to his office, reaching by 7.30am, and keeps himself busy in review meetings before walking out after 6.30pm.

“We only have a market share of 170 basis points (bps) in overall credit and the ambition is to get to 3-4% in the medium term," says Jain, seated in a scenic rooftop breakout area of the Bajaj Finserv office. “The other part is that we want to reach 100 million customers and have a share of 4-5% of India’s retail credit market."

Jain pointed out how strategies have changed over time. In 2014, Bajaj Finance realized that it needed to build a more granular book of liabilities to support its assets. It followed the example of HDFC Ltd, which until its July merger with its banking arm HDFC Bank, used to be a deposit-taking NBFC. Bajaj Finance started sourcing customer funds as deposits to build a granular liability book. As on 30 June, deposits stood at 49,994 crore, accounting for 21% of its total liabilities. The share of deposits has risen from 4% in 2014-15 and the lender wants to take it to 25% over time. This allowed the company to access smaller sums of money from customers instead of relying solely on banks and the money market for funds.

Challengers abound

Although the going so far has been good, Bajaj Finance, the biggest contributor to Finserv’s bottomline, today faces competition in certain segments of the market. Armed with digital capabilities, more financiers, some of them nimble fintechs, have crowded the space. Add resource-heavy private banks to the mix and consumers are spoilt for choice.

If that’s not enough, Mukesh Ambani’s Reliance Industries Ltd is waiting in the wings and eyeing a slice of the consumer loan pie. Through Jio Financial Services, the conglomerate will target the consumer finance, asset management and insurance markets. Although little is known on the kind of products it will offer, it will be in direct competition with Bajaj Finserv in these three segments. Ambani said last month that Jio Financial would use predictive data analytics to co-create “contextual products with partners" and that Reliance has capitalized it with a net worth of 1.2 trillion. There is, however, no clarity on when Jio Financial will launch operations and it could be a while before it gets all the requisite permissions to do so.

Brokerages are divided over whether Jio’s entry will shake things up for Bajaj. For instance, BofA Securities said in a note in August that Jio Financial Services could pose a risk to Bajaj, BQ Prime reported on 23 August. However, BoB Capital Markets believes the scope to supercharge growth at Jio will be constrained by tough competition and high collection costs and does not see the entity eroding Bajaj’s customer base.

Bajaj, however, is unfazed and believes there is enough room for everyone. His confidence also stems from having built the business over many years, and putting people on the ground at outlets.

But analysts also point out that banks are now trying to get a foothold in the consumer durables market, threatening to eat into Bajaj Finserv’s turf. While private banks always had a presence in the personal loan market, their PSU peers are now warming up to the idea. Indeed, banks such as State Bank of India and Bank of Baroda are quite bullish on the personal loan segment.

“Increasing competition from banks, lower market share in online consumer product sale financing could be key risks in the longer term," Jefferies said in a note on 26 July.

Moreover, as more people move online to buy consumer durables using their credit cards, Bajaj might find it difficult to keep growing at the current pace. To be sure, some e-commerce portals allow Bajaj’s EMI card holders to stagger repayment over a few months at zero interest, replicating its brick-and-mortar store model. However, the competition is making deep inroads.

The Tata Group’s home appliance company, Voltas, recently said it has seen Bajaj Finance lose market share in channel financing—working capital loans provided to distributors and dealers. The management told analysts on 12 August that while Bajaj is losing ground, it still has a larger share than other contenders.

Competition could come from within the larger Bajaj group too. Bajaj Auto recently received approval from the eserve Bank of India (RBI) to start an NBFC, two years after it had announced setting up a captive finance unit.

Credit card focus

On its part, Bajaj Finance has been quick to grab new opportunities. Last year, moving away from its policy of not allowing NBFCs to issue credit cards without a bank as a partner, RBI allowed non-bank financiers to go solo in the credit card business, after approval. Soon after, Bajaj Finance decided to apply for clearance and is awaiting a response from the regulator. The company currently has two tie-ups: with RBL Bank and DBS India. Bajaj Finance has no plans of abandoning these partnerships even if it gets approval for a standalone credit card licence and plans to continue the partnerships for three to five years, while building its own proprietary credit card book.

“If I run my own book, I would run it a bit differently than I run the partners’ book. Partnerships mean that we have to take care of their interest as we have a fiduciary responsibility," says Jain.

In 2022-23, Bajaj Finance sold 1.9 million co-branded credit cards, 41% more than in the previous fiscal year. It also has a special card that offers equated monthly instalments to customers and has an active base of 41.6 million. The lender could use these captive users to push its solo as well as co-branded credit cards.

The exuberant growth in retail loans in India in the past few years has aided Bajaj’s growth trajectory. Given its position as one of the largest consumption financiers, any stress on repayment capacity puts Bajaj at risk. The RBI has been contemplating bringing in tighter capital requirements for banks to safeguard against growth of unsecured loans. With the regulator moving to harmonize regulations of banks and non-banks, large NBFCs such as Bajaj could also get impacted.

To be sure, Bajaj has started taking steps to ensure it comes out unscathed in case there is any impact on repaying capacity. It has shrunk fresh loan volumes to some rural customers after seeing initial signs of stress.

“Any seasoned person who has watched cyclical businesses would say that seeds of problems are sown in the best of the times. So, I think financial services businesses lend themselves to being worriers," says Jain when asked if anything keeps him awake at night.

Bajaj Finance’s net bad loans as a percentage of total loans stood at 0.34% in 2022-23, down from 0.68% in 2021-22 and 0.75% in 2020-21.

There is, however, a darker side to those bad-loan numbers, with allegations of harsh recovery practices strewn all over social media. In fact, it even faced the scrutiny of the RBI, which in January 2021 fined it 2.5 crore. The penalty was on account of Bajaj Finance’s failure to ensure recovery agents did not resort to harassment or intimidation of customers during debt collection efforts.

“There were also persistent/repeat(ed) complaints about recovery and collection methods adopted by the company," said a press release on the RBI website.

The group, meanwhile, has been conducting an exercise to familiarize its employees with all aspects of financial services. About five years ago, it created common grade bands for employees, irrespective of which company they worked for, allowing them to move within the group easily. It has also created a job posting platform to push mobility of cadre within the group, and is grooming the next generation of leaders, preparing those in junior and middle management to take over senior management roles in a decade.

At some point, the 53-year-old Bajaj himself will have to pass the baton on to future leaders. Asked about succession planning, Bajaj says, “If you are referring to my own children, firstly as you know, I’m a part of the Bajaj group and my role is to run these companies as part of the group. But the group is larger than just me and my family; my daughter works in Bajaj Finance right now and is applying for her MBA; my son is studying in England. And both have a long way to go."

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