Bajaj Finance’s flexi-loans move draws criticism

The company, India’s largest non-bank lender, disclosed the conversion at its annual general meeting on Tuesday. Under flexi-loans, borrowers are typically allowed to defer principal repayments for a while, for which the lender charges a fee or higher interest. Such products are fairly common. However, the conversion has raised asset-quality concerns because of its timing. According to the first-quarter earnings reported this week, Bajaj Finance has converted ₹8,600 crore of term loans into flexi-loans for a switch fee, allowing customers to service only interest for a predetermined period.

“The question is whether this product amounts to quasi-restructuring and how should the ₹3,600 crore of loans which are currently under moratorium be treated once converted into a flexi loan. While the company says nearly 25% of the loan book was flexi loans before covid, there are concerns whether the company is going up the risk curve for profitability in these challenging times. Therefore, are we understanding the risk correctly?" an analyst with a foreign brokerage said on condition of anonymity.

The Bajaj Finance management, however, clarified it has been offering flexi loans for the last five years. As of 31 March, the lender had existing flexi loans of ₹36,846 crore. “In the first quarter, we were offering the loan product to customers with no overdue and good repayment track record. Of the ₹8,600 crore of switched loan, ₹5,000 crore was given to customers not under moratorium and ₹3,600 crore under moratorium. It’s important that customers get back to making monthly payments," Rajeev Jain, MD & CEO, Bajaj Finance.

Flexi loans which constituted ₹8,600 crore this quarter constitute 6.2% of total assets under management. Of this, 2.6% is under moratorium. At the end of the first quarter, the consumer durable financier saw the loan book under moratorium reduce to 15.7% of total assets under management from 27.1% as of 30 April. The consolidated moratorium book stands at ₹21,705 crore as of 30 June. “We believe these loans are in the normal course of business, comparable to other EMI or interest-only/working capital demand loan (WCDL). An increase in this facility by ₹8,600 in the first quarter is no doubt high but even if we add flexi borrowers under a moratorium of ₹3,600 crore, the moratorium ratio increases to 18%," a Kotak Institutional Equities report said.

According to a note by Edelweiss Securities, this product reduces the EMI burden by nearly 50% which will help customers in these challenging times. “Is there an uncertainty on these products —to an extent, yes, but then, this was a need of the hour and anyways, the company has longer than five years’ experience in handling this product," it said.

The management also said only customers with a good credit history are eligible for this loan and hence, there are no concerns on asset quality.