Informist, Wednesday, May 12, 2021
By T. Bijoy Idicheriah
MUMBAI – Bajaj Finance Ltd is keen to transition into a bank if the Reserve Bank of India follows through on a recommendation to allow corporate-backed non-banking finance companies to turn into banks, its Managing Director Rajeev Jain said.
"After this crisis, we are clear that the eventual destination will have to be a bank subject to RBI approval," Jain told Informist in an interview. "The RBI internal working group recommendations are in line with our thinking. If they get inked finally in the same shape and form, then we are reasonably comfortable with that."
From a liability perspective, the COVID-19 pandemic highlighted how banks were in a better position than non-bank lenders to tackle such a crisis, he said.
To transition into a bank, promoter holding would need to be sharply cut to 26%, Jain said, adding that all stakeholders were on the same page on this issue.
Promoters, led by the Rahul Bajaj group, currently hold 56.1% stake in Bajaj Finance. Bajaj Finserv directly holds 52.74%.
While many may argue that Bajaj Finance has tackled the crisis with relative ease, it is always possible for the company to not be in the right space when a bigger crisis hits, Jain said, adding that the world had turned volatile, with each crisis becoming bigger and bigger.
"As your size grows larger, fundamentally you will have to take a call one day. For now, we will plan towards it, work towards it, we grow liabilities franchise while remaining a non-bank, we build a rural business strongly, and we do financial inclusion. There are a whole set of steps to be taken," he said.
Even if the central bank allows corporate-backed NBFCs to transition to banks, Bajaj Finance will take its time in applying for a licence. "Primarily, we want to be a retail bank which is what we know. That means it's a long haul and we have to prepare for it in advance. If the bank is a three-year walk, then the work starts now and not when you become a bank," Jain said.
Asked if the recent stringent liquidity buffer norms for NBFCs would help make the transition to a bank easier, Jain said that at one point during the pandemic, Bajaj Finance held 20% as liquidity buffer after meeting the statutory liquidity ratio on the retail liability book.
This effectively meant that the liquidity on its books was 21-22%, he said.
Though Bajaj Finance would prefer an 'open banking' approach to target consumers if it becomes a bank, the lender would set up a core banking solution if regulations require it to do so, he said.
Bajaj Finance, he said, already uses Finacle software for its liability business.
DIGITAL TRANSFORMATION
Bajaj Finance is undergoing a digital transformation and aims to launch a three-in-one consumer app by Sep 15, Jain said. For this, seven internal and merchant apps are working together to ensure consumer requests flow seamlessly in the ecosystem that integrates all these applications.
"This is a business where you will need someone in the company to either assist you to do the transaction or to do the transaction for you," Jain said.
The new digital frame has a distributed structure in terms of applications, but will come together seamlessly from a customer point of view. This which will help reduce costs, generate greater velocity in terms of leads and business, and change customer experience as a whole.
Jain compares this strategic shift in digital framework to Bajaj Finance's decision to become a diversified lender 14 years ago.
Most of the investment on the three-in-one app has already been done. A large part of the cost is not linked to technology, but to attracting the right talent to handle the shift to consumer orientation, Jain said.
"To address your question in a different way - will this mean opex-to-NIM will look higher, the answer is no, it will look lower eventually," he said. "We have been doing this for six months, and it has not led to any material rise in cost-to-income."
LOOKING AHEAD
Bajaj Finance is known for overperforming on key performance metrics. In the 12 years to 2019-20 (Apr-Mar), the lender's assets under management grew at a compounded annual rate of 45%, net interest income at 39%, and profit after tax at 58%.
In 2020-21, however, growth in most key performance metrics of Bajaj Finance was extremely muted--assets under management grew 4% on year, net interest margin rose 2%, and profit after tax fell 16%, thanks to the pandemic.
But Jain believes aggressive provisions, digital architecture build-up, and capital and liquidity buffers will provide a major fillip to the NBFC in 2021-22.
"So Apr-May will be hit by lockdowns which can be made up in the balance 10 months. This is not coming from hope, it is coming from experience. What we saw from September to March is an unprecedented bounceback."
Only in the unlikely event of another nationwide lockdown and loan moratorium would there be a need to change this expectation, he said.
Bajaj Finance's assets under management grew almost 95 bln rupees in Jan-Mar on a quarterly basis, even though many lenders faced a slowdown. If no major credit quality issue hits Bajaj Finance, it is possible to increase assets under management by 100 bln rupees in a quarter for the year as a whole, Jain said.
For 2021-22, Bajaj Finance expects assets under management to grow 25-27%, profit to rise 23-24% and gross and net non-performing asset ratios in the range of 1.4-1.7% and 0.4-0.7%, respectively.
"This will mean return on assets of 3.3-3.5% and return on equity of 19-21%," Jain said.
This is achievable as Bajaj Finance's tier-I capital is at 25%, and the lender has an all-time low leverage, and excess liquidity of 150-160 bln rupees, he said.
Though Bajaj Finance had intended to bring down excess liquidity, it chose to bulk up its buffers as money was available at ultra low cost, Jain said.
Bajaj Finance's average cost of funds in 2020-21 was 7.39%, he said. If the company sheds some of this excess liquidity and there is a 100-bps fall in cost of funds, that alone would give the company 7-8 bln rupees of profitability momentum, he said.
On the asset quality front, Jain expects credit costs at 160-170 basis points. Any deviation from this, he said, would not exceed 10-15 basis points even if the lockdowns persist for a little beyond May.
SUBSIDIARY FOCUS
Jain expects 2021-22 to be big for the company's wholly-owned arm Bajaj Financial Securities, after the spending on talent acquisition, technology and capital infusion of 1.5 bln rupees.
"The new on-boarding app to open a trading account is just going live. The new trading app will go live on May 31. I will be quite excited about the business this year. The intent is to dominate in the medium term in this space."
Beyond the core broking operation, Bajaj Financial aims to build a large and fully functional securities business across loan against securities, margin trade finance, discount brokerage, high net worth individual broking, and financing of employee stock options.
The capital base and track record of the mortgage business, which was hived off three years ago into Bajaj Housing Finance, has brought down cost of funds, and Jain says there is an opportunity to be one of the top five-six players in the segment.
"I have a view that that market is getting consolidated very rapidly and there will be very few non-banks left and we will be one of those. Overall, the market will get consolidated between six-seven players," he said.
Jain expects Bajaj Housing Finance's funding costs to fall to around 6.75% this financial year from 7.0% in 2020-21.
On a consolidated basis, Bajaj Finance wants the housing finance arm to contribute about 35% or more to its loan book from 32% at the end of March, as mortgages provide stability. End
Edited by Mainak Moitra
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