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The share price of Bajaj Finance has eroded a whopping 21% since the lockdown (Bajaj Finserv)
The share price of Bajaj Finance has eroded a whopping 21% since the lockdown (Bajaj Finserv)

With its growth story locked down, Bajaj Finance faces an eclipse year

  • Gross bad loan ratios at 1.61% as of March were reasonably low but this is bound to change now with the twin blows of low growth and potential rise in slippages
  • Emerging pressure on wages, job losses and growing distress among small businessmen make conserving asset quality a tall task

After a dream run for over a decade, India’s largest non-bank consumer lender and its investors are coming to terms with a new normal of low growth and asset quality erosion.

Bajaj Finance Ltd knows that it cannot do much about low growth because Indians cooped indoors are unable to spend beyond essentials.

Analysts already expected growth to suffer in FY21, especially after the lender said last month that new loans grew a mere 3% in the March quarter, against the high double-digit growth over the previous many quarters. Indeed, the financier’s share price has eroded by 58% since mid-February, reflecting the growth impact.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

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What would matter now is how Bajaj Finance is able to get its borrowers to keep repaying. Here, the risks are stacked up against the lender.

Already 27% of its book is under moratorium as of April and this is growing, according to the management. It is clear that more and more of its borrowers are unable to pay. The management said the moratorium indicates borrowers want to conserve cash and not that their credit quality has deteriorated necessarily. The fact that the lockdown, now up to 70 days, is worse in urban centres, is not helping Bajaj Finance. “The longer than expected lockdown will likely put pressure on Bajaj’s ability to manage recoveries translating to further downside risks to near-term estimates," wrote Kotak Institutional Equities analysts in a note.

Gross bad loan ratios at 1.61% as of March were reasonably low, but this is bound to change now with the twin blows of low growth and potential rise in slippages. Slippages as a percentage of loans have already increased over the past one year. Indeed, the true picture on slippages will emerge as lenders won’t be able to give moratorium on loans beyond this month.

The emerging pressure on wages, job losses in various sectors and growing distress among small businessmen make conserving asset quality a tall task for Bajaj Finance.

The risks are high, but the lender has ramped up provisioning, too. It provided 900 crore towards covid-19 risks, taking total provisioning to 1865 crore. Analysts are not ruling out the requirement of more provisions in the coming quarters. “We appreciate Bajaj Finance’s superior liability franchise and strong collection network. However, a clarity over growth and NPAs will only come after the lockdowns and completion of the moratorium," wrote analysts at Emkay Global Financial Services Ltd.

Trading at a multiple of 3.4 times its estimated book value for FY21, Bajaj Finance is still the most valued among diversified non-bank lenders. FY21 is likely to be an eclipse year and analysts at Morgan Stanley are betting on the lender’s performance to improve in the medium term. For now, all Bajaj Finance needs is to keep its delinquencies limited.

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