MUMBAI :Bajaj Finance Ltd’s worst fears over balance sheet growth have come true in the first quarter of FY21 as a strict lockdown decimated consumption, especially discretionary spending.
Quarantined at their homes, Indians refrained from making purchases using convenient equated monthly instalments (EMIs), bringing the year-on-year assets under management (AUM) growth to a mere 7% for the consumer lender. This is the slowest growth in the past 10 years and, in fact, AUM fell on a sequential basis.
All indicators of growth were a shadow of what Bajaj Finance witnessed in the past quarters. For instance, the company managed to add 1.7 million new loans during the June quarter as against 7.3 million in the year-ago period.
But there is relief for the company, too. Its AUM under moratorium has reduced from 27% as of end-April to 15.5% on 30 June. What this means is that borrowers have reverted to their regular EMI repayments. The management had earlier indicated that many customers had availed the moratorium to conserve cash and, hence, moratorium levels should not be seen as signs of stress.
Even so, the moratorium period has been extended by three more months to August and the trend in the second quarter would be more defining for the lender. “We also need to keep an eye on the overall trend in bounce rates (37% during Q4FY20) as well as absolute quantum of moratorium pending, which would be a key aspect for future provisioning requirement," Emkay Global Financial Services Ltd analysts said in a note.
While the lockdown restrictions across India have been lifted, several urban regions are still under various degrees of lockdown and consumption is yet to revive. The extent of impact on wages and job prospects, too, are not clear. More importantly, the infection curve of covid-19 is still steep, a sign that lockdowns could be reimposed.
The fact that Bajaj Finance is considering more provisions towards delinquencies, despite its moratorium book reducing, shows it is aware of these risks.
It is clear that Indians won’t turn to discretionary purchases using EMIs soon. The growth story, which was the bedrock of Bajaj Finance’s valuations, is now shaken. The stock has lost 27% from its peaks during February, reflecting the new normal in growth.
But the lender knew it could do little about growth during the pandemic. It chose to focus on asset quality and it is seeing some success. That said, investors will do well to watch the second quarter closely for trends on asset quality. Also, the focus on asset quality means growth will continue to be affected. “Considering the cautious management approach, the declining trend (in growth) is expected to continue even during Q2FY21," Emkay’s analysts added.
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