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Photo: Ramesh Pathania/Mint
Photo: Ramesh Pathania/Mint

Bajaj Finance plays it safe with Q2 provisions, as covid hit runs deep

  • The NBFC’s profit dropped 36% as it set aside 1,634 cr towards potent risks to its asset quality
  • Management is copiously cautious which signals that the lender won’t grow its AUM in a hurry

Consumer lender Bajaj Finance’s September quarter performance showed that recovery from the covid-19 pandemic could be sluggish and long drawn.

The non-banking finance company’s net profit dropped 36% from the year-ago period, as it had to set aside 1,634 crore towards asset quality risks.

Gross NPA for the Q2FY21 excludes the impact of forbearance
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Gross NPA for the Q2FY21 excludes the impact of forbearance

That is more than double compared with provisions made a year ago, but on the same lines of the June quarter. It shows that the pandemic’s impact on the balance sheets of its borrowers has been harsh. Needless to say, the provisioning led to the miss on the financier’s bottomline.

The lender’s gross bad loans were 1.03% of its book, which is lower than those registered a year ago.

Bajaj Finance is focused on keeping risks on the asset quality front to the minimum and wherever needed, providing for it.

It has even provided for accounts where asset recognition was on a standstill. The ongoing petition on compound interest at the Supreme Court has resulted in a standstill on bad loan recognition. The apex court has said that lenders cannot label a loan as non-performing even if the borrower defaults until the petition is settled. Bajaj Finance said that in the absence of the apex court’s standstill, gross bad loans would have been higher at 1.34%.

The management commentary was copiously cautious. In an analyst call, the management said it does not believe in going slow on provisions or chasing growth during a pandemic. “We are risk managers and we want to take risk where we can get the money back," said Rajiv Jain, managing director of Bajaj Finance.

This shows that the lender won’t be growing its assets under management (AUM) in a hurry. The AUM growth has been severely impacted by the pandemic, visible in the 5% contraction in the September quarter.

Analysts do not expect more than 6% growth for the whole year of FY21. That said, the lender is hoping the festival season may boost growth. In the September quarter, the lender managed to garner 3.6 million new loans, which is not even half of what it had added a year ago.

Bajaj Finance’s struggle for growth highlights the weakness in consumption demand. It shows that Indians are not ready yet to borrow for discretionary purchases.

At best, individuals may be dipping into their savings for doing so. As such, discretionary spending has reduced in a big way with travel and recreation limited to the bare minimum.

Bajaj Finance’s stock has underperformed the broad market so far this year. The share price is down 33% from its highs in February, while the benchmark Nifty is down just 2.2%. This shows that pessimism over growth has already been a worry for investors.

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