Home >Markets >Mark To Market >Bajaj Finance and HDFC Bank show how the pandemic hit consumption

Consumer lender Bajaj Finance Ltd and India’s most valued lender HDFC Bank Ltd have shown how the pandemic initially forced Indians to cut consumption and has even now kept a lid on it.

HDFC Bank’s retail loan book growth has dropped to single digits in FY21.

Bajaj Finance too has seen sharp erosion in growth of its assets under management (AUM).

Both lenders have released early updates of key metrics for the fourth quarter.

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Bajaj Finance’s fourth-quarter metrics showed a mixed picture. The lender has been able to add new customers at a rate similar to pre-pandemic levels but the drop in AUM growth from the previous year stands out.

The non-banking financial company (NBFC) said it added 2.3 million new customers and 5.5 million new loans during the quarter. Bajaj Finance has been able to keep the rate of new customer accretion healthy.

However, that has been an outcome of not just the company’s efforts but also some luck.

Analysts believe that the competition from HDFC Bank may have reduced a bit after the lender was penalized by the regulator on digital lapses. That penalty seems to have cost HDFC Bank some growth on its retail book. The brisk 13.6% growth of the bank’s loan book came largely from its corporate book.

Retail loans grew by 7.5%, far lower than the previous years. The fact that HDFC Bank could not issue new credit cards worked in favour of Bajaj Finance.

The bank has been giving tough competition to the company on consumer loans since the pandemic outbreak.

Even as the two lenders compete, it is evident that Indians have pruned their consumption spending, mostly discretionary.

While analysts expect an improvement in FY22, the risks to loan growth recovery have already started showing. The second wave of the pandemic has resulted in many regional lockdowns.

While FY21 was challenging compared with previous years, both lenders have shown improvement in metrics.

Analysts at Morgan Stanley pointed out that Bajaj Finance’s AUM growth of 4% has exceeded expectations.

“We expect the company to have seen healthy traction in consumer B2B (business-to-business) loans and commercial loans. We also expect a gradual uptick in mortgage loans and consumer B2C (business-to-consumer)," wrote analysts at Motilal Oswal Financial Services Ltd in a note.

HDFC Bank has weathered the pandemic better than most of its peers.

However, a key metric, asset quality, needs to be monitored. The pandemic’s resurgence could hit asset quality again, according to analysts, with those at Credit Suisse watching out for an increase in provisioning and credit costs for Bajaj Finance in the upcoming quarters.

The company’s shares are down 5% since January. HDFC Bank shares are up a little more than 1%.

HDFC Bank needs to resolve its digital troubles and get back on track on credit cards for premium valuations to show more shine.

Meanwhile, Bajaj Finance would do well to convince investors over its asset quality.

But more than that, signs of the second wave getting controlled would bring back investors faster.

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