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Consumer lender Bajaj Finance Ltd may have dodged the bullet on growth from the second wave, but the pandemic’s resurgence has hit asset quality in a big way. This puts the lender’s valuation at risk given its shares have outperformed the broad market since April.

Bajaj Finance reported a jump in gross bad loans for the June quarter, with the severity of the pain concentrated in auto loans. Gross bad loans formed 2.96% of the book, sharply up from 1.79% in the previous quarter. Bad loans in the auto finance portfolio surged to nearly 20% from 9.3% in the previous quarter.

Stage two assets as a percentage of loans in the two- and three-wheeler loan portfolio remained elevated at 16.35%
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Stage two assets as a percentage of loans in the two- and three-wheeler loan portfolio remained elevated at 16.35%

Borrowers across all categories showed an increase in stress. Assets categorized as stage two, where two repayment instalments are overdue, have also risen sharply. Here, small business loans and auto loans showed the most pain.

Stage two assets as a percentage of loans in the two- and three-wheeler loan portfolio remained elevated at 16.35%. The ratios for business-to-consumer (B2C) loans rose to 3.78% and the rural segment for the same more than doubled to 3.59%.

The spread and virulence of the second wave have been more pronounced in rural centres and the impact is seen on Bajaj Finance’s portfolio. Given the uncertainty, the management refrained from giving a clear guidance on future stress. Even its numerical commitment to bring down the gross bad loan ratio to 1.7-1.8% by March hinges on the absence of a third wave.

To be sure, the company has committed to protect the balance sheet and may resort to more provisioning or write-offs to bring down bad loans, the management said in an earnings call with analysts on Tuesday.

One silver lining is that the lender saw improvement in repayments in July. “July seems in line with March; in fact better than March. If lockdowns don’t happen again, we are better placed to handle the situation," said Rajeev Jain, managing director, on the call. The upshot, though, is that Bajaj Finance investors must brace for a prolonged period of stress.

The picture on growth isn’t alarming. To be sure, the impact on assets under management (AUM) growth is milder than last year, but the recovery of the March quarter has been halted. But the AUM growth is a mere 4% on a sequential basis and customer accretion was lower.

The impact on growth has been pronounced mainly because the business-to-business (B2B) segment was hit the most, according to Jain. Analysts believe that a big risk to the lender’s growth is lockdowns, even localized ones. The recovery here purely hinges on the potential third wave’s impact.

The pandemic may have hit Bajaj Finance’s performance but the lender continues to focus on a longer-term goal of entering the payments arena. The lender announced in January 2020 that it would venture into the payments space, currently occupied by large companies such as Alphabet Inc., Flipkart and One97 Communications Ltd. The management has said that work on Bajaj Pay, which will be a single-point access to a slew of payment solutions, is on schedule to be launched in October.

Jain said Bajaj Finance is not too worried about existing competition. “We don’t have a customer acquisition problem. We are fully KYC. Our focus is on engagement," he said.

While the pandemic will determine whether investors favour Bajaj Finance, the payments hat of the lender may add some excitement.

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