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Bajaj Finance expects its credit costs to increase more than anticipated before (Bajaj Finserv)
Bajaj Finance expects its credit costs to increase more than anticipated before (Bajaj Finserv)

For Bajaj Finance, recovery from the coronavirus pandemic would be slow

The hazy outlook on mobility, along with the veil of moratorium on asset quality has dimmed the firm’s prospects

Consumer lender Bajaj Finance Ltd’s first quarter metrics were an ugly picture of how a pandemic can destroy consumption. Asset-under-management growth was 7%, a shadow of the 35-40% the company averaged in previous quarters. The lender added fewer customers than before as its sales operations were severely crimped by the national lockdown.

Unable to collect repayments as well as push products, Bajaj Finance’s growth has suffered and so has its share price. After all, its valuations leaned heavily on its growth story. But the blow to growth is not news to investors as the company had given ample warnings before.

What investors didn’t like was the fact that the firm’s net profit for the June quarter missed Street estimates. Also, what perhaps added to the gloom was the “guidance" from the firm, which dragged the stock down 4% on Tuesday. In its presentation, the lender indicated that its earlier assessment of risks may not have been adequate. Bajaj Finance now expects its credit costs to increase more than anticipated.

“The company has now updated its credit cost scenario model for FY21 considering extended disruptions. It now estimates its credit costs to increase by 100-110% ( 6,000-6,300 crore for FY21) over the pre-pandemic credit cost of previous year," the lender said.

Analysts believe that this increases the odds of higher provisions in FY21 and therefore the pressure on earnings would persist.

Another odd move was the lender converting 8,600 crore term loans into what it calls flexi loans. Part of the arrangement is that the borrower need not pay principal for 1-2 years. While the firm has not termed this as restructuring, there is a change in repayment schedule. Asset quality of these loans now come under a cloud.

Bajaj Finance set aside 1,450 crore as contingency provisions toward covid-19 risks. This is higher than the 900 crore it had provisioned in the previous quarter. The good side of this is that the lender has a total contingency provision of 2,350 crore, which covers about 10% of its moratorium book. What’s more, the moratorium levels are down. About 15.7% of the lender’s loan book was under moratorium in June, down from 27% in April. The consumer lender is unlikely to quickly recover even by its own cautious outlook. Several urban centres in India are still under various degrees of restrictions, and regional lockdowns are trickier. Bajaj Finance is aware of these risks.

The lender has chosen to focus on minimizing asset quality issues rather than pursuing growth. A hazy outlook on mobility due to regional lockdowns along with the veil of moratorium on asset quality has put the firm’s prospects under a cloud. Investors may await further clarity after the moratorium period ends.

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