Bajaj Finance Ltd. (‘BFL’, ‘Bajaj Finance’, or ‘the Company’) is a deposit-taking Non-Banking Financial Company (NBFC-D) registered with the Reserve Bank of India (RBI). It is a subsidiary of Bajaj Finserv Ltd. and is engaged in the business of lending.
BFL has a diversified lending portfolio across retail, SME and commercial customers with a significant presence in urban and rural India. It accepts public and corporate deposits and offers variety of financial services products to its customers. It has two 100% subsidiaries: (i) Bajaj Housing Finance Ltd. (‘BHFL’ or ‘Bajaj Housing’), which is registered with National Housing Bank as a Housing Finance Company (HFC); and (ii) Bajaj Financial Securities Limited (‘Bfinsec’), which is registered with the Securities and Exchange Board of India (SEBI). BHFL started its business in the financial year 2017-18 (FY2018). Bfinsec is yet to start its operations.
Financial year 2018-19 (FY2019) began with an expectation of higher growth as the economy seemed to have overcome the teething troubles of the nation-wide roll out of the Goods and Service Tax (GST). However, a rise in the current account deficit (CAD), concerns relating to rising non-performing assets (NPAs) and decline in liquidity coupled with hardening interest rates contributed to uncertainties around a higher GDP growth rate.
The second advance estimates of national income for FY2019 released by the Central Statistics Office (CSO) on 28 February 2019 showed that the economy could not continue the expected growth momentum. GDP growth in the third quarter of FY2019 reduced to 6.6% after clocking 8.0% and 7.0% growth in the first and second quarter of FY2019 respectively. The CSO estimates GDP growth in FY2019 at 7.0% compared to 7.2% in FY2018.
Gross fixed capital formation (GFCF) provided a pleasant surprise, with the share of GFCF to GDP growing to 32.3% in FY2019 (second advance estimates) versus 31.4% in FY2018 (first revised estimates). However, it is perhaps too early to expect this recent uptick in the share of GFCF to GDP to provide a definite impetus to growth.
Table 1 gives the data on real GDP and gross value added (GVA) growth over the last four financial years.
Source: Government of India, CSO. (E) denotes estimate
On the back of a widening trade deficit, the CAD increased to 2.6% of GDP during April-December 2018 — up from 1.8% in April-December 2017. There was a net outflow of USD 17.5 billion of foreign currency reserves in April-December 2018 versus a net inflow of USD 30.3 billion over the same period a year earlier.
The good news was inflation. During the second half of FY2019, the consumer price index (CPI) which steadfastly remained below the RBI’s medium-term target of 4%, reaching a 19-month low of 1.9% in January 2019. It picked up marginally in February to 2.6%, albeit supported by a weak base and uptick in prices of some food categories. The RBI has projected headline inflation to remain soft in the near term: 2.4% in Q4 FY2019, 2.9% to 3% in H1 FY2020, and 3.5% to 3.8% in H2 FY2020. It did, however, acknowledge the monsoon risk from El Niño conditions and highlighted uncertainties in oil price movement.
Clearly, at this point, the RBI does not see inflation as a material risk. This has been underscored by the majority of the members of the RBI’s Monetary Policy Committee (MPC) — when they recommended two successive cuts of 25 bps each in the policy rates and also maintained a neutral monetary stance.
While gross NPAs of scheduled commercial banks declined from 11.5% in March 2018 to 10.8% in September 2018, thus putting out hope of an orderly resolution, the Supreme Court intervened and created uncertainties. It’s recent decision setting aside the RBI’s circular of 12 February 2018 to replace several existing restructuring schemes by a formal process under the Indian Bankruptcy Code, has resulted in considerable ambiguity regarding NPA resolutions. The RBI has issued a statement that it will take necessary steps, including issuing a revised circular, as may be necessary, for expeditious and effective resolution of stressed assets. Until such a circular is issued, the classification of NPAs and provisioning requirements would be left to individual banks — thus accentuating an already deep malaise.
Systemic liquidity swung between surplus and deficit during FY2019, with the RBI needing to intervene to smoothen liquidity flows. This liquidity stress was compounded thanks to major debt defaults of a systemically important NBFC. The default resulted in a virtual drying up of the money markets; and access to funds for borrowers such as NBFCs and HFCs were deeply impacted. The consequent increase in interest rates for fresh borrowings in Q3 FY2019 resulted in business disruptions. While H2 FY2019 has been an extremely challenging period for both NBFCs and HFCs, these disruptions have not yet completely settled.
Banking credit continued to post double-digit growth, registering 14.1% increase on-year as of 15 March 2019. However, this growth was still not broad-based. Industrial credit growth continued to remain anaemic, while the service sector and the retail segment saw fairly strong growth in bank credit. However, the healthy credit growth from banks to non-banks was largely nullified by money markets refraining from lending to NBFCs and HFCs during Q3 FY2019.
In this challenging environment for NBFCs, BFL signed off FY2019 with a 41% growth in consolidated assets under management (AUM) and a 60% growth in consolidated profits. BFL’s cost of fund increased only by about 5 bps in FY2019 over FY2018
Despite such excellent outcomes, we at BFL believe that FY2020 may be a challenging year. Our views are based on four factors:
Having stated our concerns, it should also be stated that, with a large customer franchise, strong liquidity position, diversified portfolio mix, granular geographical distribution and robust risk metrics, we at BFL are confident of successfully dealing with these challenges in FY2020.
NBFCs continued to grow their share in the financial services industry. Data published by the RBI in its Financial Stability Report dated 31 December 2018 show that NBFCs have outperformed scheduled commercial banks (SCBs) on growth in advances, asset quality and profitability. This growth momentum of NBFCs should result in their share in financial services sector increasing in the near future. Table 2 gives the data.
Source:Financial Stability Report of RBI dated 26 June 2018 and 31 December 2018.
BFL enjoyed yet another strong year of performance aided by a diversified product mix, robust volume growth, prudent operating costs and effective risk management. With a consolidated AUM of ₹ 115,888 crore and a standalone AUM of ₹ 98,671 crore, BFL has emerged as one of the leading diversified NBFCs in the country today.
BFL has adopted the Indian Accounting Standards (Ind AS) for FY2019. This involves giving Ind AS compliant comparatives for FY2018 and as at 1 April 2017 — the last being the date of transition. Accordingly, figures for previous years / periods, have been recast and audited by statutory auditors as per the new accounting standards. Highlights of FY2019 are as follows:
BFL focuses on six broad categories: (i) consumer lending, (ii) SME lending, (iii) commercial lending, (iv) rural lending, (v) deposits and (vi) partnerships and services.
BFL is present in 1,830 locations across the country, including 903 locations in rural/smaller towns and villages.
BFL’s loan book continued to remain strong as a result of its deeply embedded risk culture and robust risk management practices. The Company’s consolidated net NPA at 0.63% is amongst the lowest in the NBFC industry.
BFL continued to prudently manage its ALM position permissible under the current RBI regulations. (ALM) with a strategy of raising long term debts and maintaining a judicious mix of borrowings between banks, money markets and deposits. BFL continues to closely monitor liquidity in the market; and as a part of its ALCO strategy maintains a liquidity buffer to prudently manage liquidity risk.In fact, this enabled BFL to deftly overcome the severe liquidity crisis and volatile interest rates in Q3 FY2019 because ofamajor debt repayment default by a systemically important NBFC. Consequently, the increase in cost of funds for FY2019 over FY2018 was only 5 bps.
As on 31 March 2019, consolidated borrowings stood at ₹ 101,588 crore.
Chart A depicts BFL’s standalone AUM over the last five years.
Chart B depicts the consolidated AUM.
FY2019 AUM is as per Ind AS, FY2018 AUM has been recast as per Ind AS and FY2015 to FY2017 numbers are as per IGAAP.
FY2019 AUM is as per Ind AS, FY2018 AUM has been recast as per Ind AS while FY2015 to FY2017 numbers are as per IGAAP
Table 3 breaks down the AUM across the major business verticals.
BFL continued to be the dominant consumer durables, furniture and digital products lender in India in FY2019.
BFL was the largest financier of Bajaj Auto motorcycles and three-wheelers in FY2019.
BFL’s lifestyle finance business financed approximately 481,000 transactions, which represented a growth of 52% over FY2018. As part of its product expansion strategy, the Company extended its offerings in the health care segment for elective and non-elective procedures in FY2018. This initiative has resulted in health care offerings contributing over 19% of lifestyle finance business. To further the health care financing business and facilitate hassle free processing of loans to customers, BFL has recently introduced a ‘Healthcare EMI Card’.
E-commerce consumer finance addresses the EMI financing needs of BFL customers shopping online with major e-commerce players. During FY2019, BFL also expanded this offering to online travel segment which is growing rapidly. BFL executed over 2,105,000 transactions in FY2019 compared to 702,000 in FY2018 — representing a threefold increase in volume.
The retail spends financing business offers easy instalment options to customer for small ticket purchases like fashion, travel, insurance and small appliances. The business is operational in 50 locations with a footprint of over 17,000 partner stores across India. BFL financed more than 1,460,000 purchases in FY2019 compared to 712,000 in FY2018 — representing a twofold increase in volume.
Personal loans cross-sell (PLCS) and salaried personal loans (SPL) AUM grew by 56% and 36%, respectively, over FY2018; to ₹ 13,868 crore and ₹ 8,683 crore.
SME lending offers secured and unsecured loans to its customers. Unsecured lending is done through two product offerings: (i) business loans to small and medium enterprises and to the self-employed, and (ii) professional loans.
BFL has launched two new products in the SME lending business in FY2019, namely used car financing and secured enterprise loans.
Secured lending comprises of loan against property, home loans, lease rental discounting and developer financing. Since February 2018, incremental business of secured lending has been done through BFL’s 100% subsidiary, Bajaj Housing Finance Limited (BHFL).
This business caters to financial services need of rural consumers. In FY2019, BFL expanded its rural footprint by setting up branches in two new states and penetrating deeper in the existing states. At the end of FY2019, it was present in 903locations across 13 states and union territories in India. The business had an AUM of ₹ 9,243 crore as on 31 March 2019 — up by 69% from ₹ 5,458 crore a year earlier.
BFL's rural business has also started offering fixed deposit schemes from February 2019. This will further widen BFL’s product offerings to rural customers and expand its retail liabilities business.
Commercial lending comprises of six products: loan against securities, loans to financial institution group lending, warehouse receipt financing, working and growth capital loans to auto component manufacturers, loans to light engineering industry and loans to speciality chemical industry verticals. Commercial lending business closed FY2019 with an AUM of ₹ 12,026 crore. BFL decided to wind down its warehouse receipt financing business from April 2019 given the stress witnessed in the agrarian sector and the lack of a sustainable profit model.
At the end of FY2019, BFL had a deposit book of ₹ 13,193 crore, representing a growth of 69% compared to the end of FY2018. The deposit book’s contribution to BFL’s standalone borrowing was 15% against 12% as at the end of FY2018. To grow the retail and high networth individuals (HNI) deposits, BFL has set up seven wealth management branches on pilot basis in Pune in March 2019.
In partnership with various financial service providers, BFL offers the following products to its customers: life insurance, health insurance, extended warranty, comprehensive asset care, co-branded credit card, co-branded wallets and financial fitness reports.
BFL’s co-branded credit cards business in partnership with RBL Bank continued to grow strongly in FY2019. The number of cards-in-force stood at over one million as on 31 March 2019.
BFL continued to grow its co-branded wallet business by providing EMI cards to its customer in Digital format. It launched India’s first ₹ 5K and ₹ 10K loan on its co-branded wallet and has disbursed over 242,000 loans in FY2019.
Table 4 gives BFL’s standalone financial performance for FY2019 vis-à-vis FY2018.
FY2019 profit is as per Ind AS, FY2018 profit has been re-casted as per Ind AS while FY2015 to FY2017 numbers are as per IGAAP
As an NBFC, BFL is exposed to credit, liquidity and interest rate risk. It continues to invest in talent, processes and emerging technologies for building advanced risk and underwriting capabilities. Sustained efforts to strengthen the risk framework and portfolio quality have yielded consistently better outcomes for the Company.
BFL’s balanced approach to portfolio management coupled with a rigorous portfolio review mechanism have enabled it to pick up early warning signals and take corrective actions. The portfolio continues to remain healthy and in growth mode. With use of sophisticated analytics, BFL has maintained robust portfolio quality and takes risk mitigating policy actions with agility and precision
A robust governance framework ensures that Board and its committees approve risk strategies and delegates credit authorities and a robust underwriting practices and continuous risk monitoring ensure that portfolios stays within acceptable risk levels.
BFL has deeply invested in its risk organisation structure that includes dedicated credit risk units for each business vertical; business specific units viz. underwriting, risk containment andfraud control; and horizontal risk analytics, business intelligence and operational risk management unit. This deep structure ensures granular risk management of our portfolio.
BFL’s strategy of ‘acquire and cross-sell’ to manage cost and portfolio risk, based on the axiom that an existing customer poses significantly lower credit risk than a new customer, ensures lower risk across portfolios.
BFL has experience of lending to over 34.5 million customers as of 31 March 2019. Most businesses in BFL are focused on acquiring mass affluent customers— who represent a bigger wallet, larger cross-sell opportunities and lower risk. BFL’s lending portfolio is diversified across various secured and unsecured products to meet almost all needs of the customer. The combination of a large franchise of mass affluent customers and multiple product offerings coupled with superior customer experience creates a strong cross-sell momentum,and thus reduces credit risk.
BFL has not only diversified risk across millions of customers and product categories, but has also diversified its risk and portfolio over 1,800 urban and rural locations in India. BFL’s geographically distributed portfolio helps reduce concentration risks to the minimal.
As mentioned earlier, BFL ended the year with a net NPA of 0.63% on consolidated basis. The standalone net NPA stood at 0.73%. It has, as part of implementation of Ind AS, transitioned to Expected Credit Loss (ECL) provisioning model, thereby significantly strengthening its provisioning methodology and provisioning cover on non-NPA cases — which moved up from about 40 bps to 85 bps.
BFL identifies various operational risks inherent in its business model. These cover risks of a loss resulting from inadequate or failed internal process, people and systems, or from external events. It has dedicated a new pillar — the Operational Risk Management Framework —to effectively identify, measure, report, monitor and control such operational risks.
In the past few years, the technology and analytics landscape has evolved dramatically. Newer capabilities like Big Data, Cloud Computing and Open Source Software like R and Python now allow access to statistical techniques that were not possible in the past. This has taken analytics and insights to a level where solutions are much more nuanced and specific. BFL has been an early adopter of analytics, and continues to remain fully committed to deepen and widen these capabilities to maintain and sharpen its competitive edge.
BFL leverages its large customer franchise to build robust yet nimble risk and propensity model as well as policy rules to best serve customers with offers that are most appropriate for them. To do this, BFL has deeply invested in analytics to build models to support decisions, implemented Machine Learning (ML) models in addition to classical logistic regressive models and is deeply investing in Artificial Intelligence (AI).
These models and decision trees are deployed on state-of-the-art technologies like decision engines with real time processing capabilities. These enable ‘get now’ and ‘straight through processing’ to constantly push towards a smoother and frictionless experience for our customers. While doing so, BFL is mindful of the customer’s privacy and ensures customer consent is obtained for any cross-sell offerings.
Several solutions deployed last year using machine learning for predictive insights have yielded positive outcomes. These have given BFL the confidence to commit significant investments to further the use of these new domains in BFL. Here are some examples:
BFL enjoys the highest credit rating of AAA/stable from CRISIL, ICRA, CARE and India Rating for its long term debt programme and A1+ from CRISIL, ICRA and India Ratings for its short term debt programme. Deposits programme of BFL is also rated the highest with credit rating of FAAA/Stable from CRISIL and MAAA(Stable) from ICRA. These ratings by credit rating agencies reaffirms the high reputation and trust BFL has earned for its sound financial management and its ability to meet financial obligations.
During FY2019, BFL has been assigned a long-term issuer credit rating of ’BBB –' with a stable outlook and a short-term issuer credit rating of ‘A-3' by S&P Global Ratings for its external commercial borrowings (ECB) programme. BFL’s rating of ‘BBB-' is equivalent to India’s sovereign rating assigned by S&P Global Ratings.
BFL had a total borrowing of ₹ 86,352 crore as on 31 March 2019. Its Asset Liability Committee (ALCO), set up in line with the guidelines issued by the RBI, monitors asset liability mismatches to ensure that there are no imbalances or excessive concentrations on either side of the balance sheet. BFL continued to raise longer tenor borrowings in FY2019.
The stress in liquidity in the third quarter of FY2019 on account of a debt default by a systemically important NBFC resulted in markets and regulators focusing on NBFC’s asset– liability mismatches. BFL has always ensured that constant monitoring of asset-liability matches remain a cornerstone of its treasury practices. Table 5 gives the behavioural maturity pattern of BFL’s asset and liabilities, and depicts our prudent approach toward its ALM management. As can be seen, BFL has maintained significantly positive ALM position across all buckets as against 15% negative ALM position permissible under the current RBI regulations.
Till date, BFL has assigned ₹ 10,603 crore of its receivables including ₹ 1,382 crore assigned in FY2019. The net assigned portfolio outstanding as on 31 March 2019 stood at ₹ 3,490 crore.
The Company continues to closely monitor liquidity in the market; and as part of its ALCO strategy maintains a liquidity buffer to reduce any liquidity risk.
Prudent ALM with continued focus on raising long term debts and a judicious mix of borrowings between banks, money markets and deposits have helped BFL to effectively manage its net interest margin (NIM) throughout FY2019.
BFL has been at the forefront of technology adoption among NBFCs, and has continuously leveraged existing and emerging technologies to launch new products, enhance customer acquisition and servicing processes along with simplifying the back-office.
As part of the roadmap of technology stack modernisation, BFL, for its flagship consumer finance business, has consolidated its front office, mid office and back office processes on a single cloud platform. This has brought more efficiency in the processes, increased front-end productivity, digitally enabled the merchant eco-system with an integrated view of transactions and faster time to cash.
This platform has been one the largest technology reforms for BFL’s voluminous and most dispersed sales financing business. It has potential to sustain a five-fold increase in scale over current volumes.
The Company is also actively investing and deploying capabilities in Artificial Intelligence (AI) and Machine Learning (ML) in the area of facial recognition, optical character recognition (OCR), natural language processing (NLP) and voice. These technologies will enable frictionless customer experience at various touch points. Some examples are as follows:
Enterprise technology architecture is being rapidly modernized to address the need for consumerisation as well as to manage the scale and agility requirements of the organisation. This is happening in collaboration with global technology partners and start-ups.
BFL has been deeply investing in cloud and data infrastructure, and has defined a roadmap for micro services architecture and core application modernisation. BFL follows the philosophy of distributed architecture to manage scale and agility.
Further, BFL is continuously working to transition its customer facing interfaces like web portals and BOTS on to a micro services architecture with auto scale layer supported by platform as a service (PaaS) infrastructure. This enables faster change management and provides ability to scale and deploy rapidly.
With scalable cloud based Enterprise Data Warehouse (EDW) architecture, BFL has invested in real-time data stream ingestion technology for unstructured data analysis and re-marketing. BFL now runs large data workloads on Big Data infrastructure. Having the Big Data environment co-located with enterprise data warehouse has significantly powered customer segmentation, bureau time series, collection skip trace and de-duplication workloads.
BFL strives to create a culture of “Customer Obsession”. BFL continuously listens to our customers and drive continuous transformation to provide a frictionless experience, across the lifecycle, from pre-disbursal to service. BFL constantly aims to reduce the time to disburse loans to customers with minimal documentation. BFL has enhanced and introduced varied service channels for solving customer queries and requests.
BFL has adopted Net Promoter Score (NPS) as a mechanism to gauge the outcome of its customer engagement efforts. NPS is a comprehensive global methodology to measure customer loyalty. This survey is conducted through an independent third party and its outcome is given due importance in the Company’s future planning process.
BFL’s self-service chatbot now provides support to customers across the BFL website, portal, Mobile App, and the BFL Wallet. BFL have has deployed multiple self-service options on the IVR for proactive updates to the customers. For the non-digitally savvy customers, BFL have introduced a ‘missed call service’ for getting details of latest relationships with BFL.
During the year, BFL also introduced the concept of service branches in major cities across the country. These branches provide superior customer experience using queue management system, ample seating capacity, self-service kiosks and cash deposit machines. BFL has also introduced various offerings in the language preferred by its customers. Apart from critical documents like loan agreements, fair practice code (FPC), branch notices, customer communications and channels like customer portal and mobile apps are now available to customers in vernacular languages.
To BFL, its people are a very valuable resource. In an increasingly competitive market for talent, BFL continues to focus on attracting and retaining right talent. It is committed to provide right opportunities to employees to realise their potential. As on 31 March 2019, BFL, including its subsidiaries, had 20,163 full-time employees. The Company added 4,897 employees in FY2019.
BFL conducts an annual employee engagement (ESAT) survey, through Aon Hewitt, a global leader in human resource consulting, to gauge satisfaction of employees in the Company. The ESAT survey, through a series of objective questions, assesses level of satisfaction of employees on three important dimensions:(i) say - employees consistently speak positively about the organisation to co-workers, potential employees and customers; (ii) stay - employees have an intense desire to be a member of the organisation and associate their future with the company; and (iii) strive - employees feel motivated to exert extra effort for the organisation. BFL’s ESAT score for FY2019 saw a 4 percent point increase to 89%, putting the Company in the top quartile of employee engagement across all industries in India.
BFL has featured as one of the Best Workplaces in Asia 2019 by Great Place to Work® (GPTW) Institute. BFL has been ranked 9th amongst the ’25 Best Large Workplaces in Asia, 2019‘. The award was conferred on us by GPTW after considering organisations that were recognized in one or more of their national Best Workplaces lists in Great Place to Work® chartered countries (Greater China, India, Japan, South Korea, Kingdom of Saudi Arabia, Singapore, Sri Lanka and United Arab Emirates) in the Region. More than 1,200 organisations were eligible to be considered for these honours.
BFL has an independent internal management assurance function which is commensurate with its size and scale. It evaluates the adequacy of all internal controls and processes, and ensures strict adherence to clearly laid down processes and procedures as well as to the prescribed regulatory and legal framework. BFL has further strengthened its internal audit function by investing in domain specialists to increase effectiveness of controls. The Audit Committee of the Board of Directors reviews the internal audit reports and the adequacy and effectiveness of internal controls.
BFL fulfils and often exceeds norms and standards laid down by the RBI relating to the recognition and provisioning of non-performing assets, capital adequacy, statutory liquidity ratio, etc.
The capital to risk weighted assets ratio of BFL is 20.66% (Ind AS), which is well above the RBI norm of 15%.
Bajaj Housing Finance Ltd. (BHFL), a 100% subsidiary of BFL, was granted a housing finance company license by the National Housing Bank (NHB) in September 2015 to carry out the business of (non-deposit taking) housing finance. BHFL started its lending operation from July 2017.
BHFL mainly offers the following products to its customers: (i) home loans, (ii) loan against property, (iii) lease rental discounting, and (iv) developer financing. It also has a dedicated vertical offering home loans and loan against property to rural individuals and MSME customers. Tables 6 and 7 give the snapshot of BHFL’s operation in FY2019.
Table 8 gives a summary consolidated financial performance for FY2019, including that of BHFL and Bfinsec.
Table 9 gives a select key ratios for FY2019 compared with FY2018.
* These ratios are on a standalone basis.
Some statements in this Management Discussion and Analysis describing the Company’s objectives, projections, estimates and expectations may be ‘forward looking’ within the meaning of applicable laws and regulations. Actual results may differ from those expressed or implied.