Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ on the debt and bank facilities of Bajaj Finance Limited (BFL).

 

The ratings continue to reflect Bajaj Finance's strong business risk profile, given its position as one of the largest retail asset financing non-banking financial companies (NBFCs) in the country, and expectation of comfortable capitalisation metrics. Further, the healthy earnings profile also underpins the ratings. Increased focus on risk management and data analytics should mitigate the inherent asset quality challenges in the risky asset segments. The ratings also factor in its strategic importance to its ultimate holding company Bajaj Holdings and Investments Ltd (BHIL), and parent Bajaj Finserv Ltd (Bajaj Finserv).

 

CRISIL Ratings has taken note of the Reserve Bank of India’s (RBI) direction to BFL to stop sanction and disbursal of loans under its two lending products ‘eCOM’ and ‘Insta EMI Card’. This is particularly with respect to non-adherence of digital lending guidelines, mainly on account of non-issuance of Key Fact Statements to the borrowers under these two lending products and the deficiencies in the Key Fact Statements issued in respect of other digital loans sanctioned by the company. BFL announced subsequently that it has temporarily suspended issuance of Existing Member Identification cards (EMI cards) to new customers. BFL began offering its EMI card in the year 2012 as a cross-sell product through their EMI network – Point of Sale channel partners (offline). The company also began offering the EMI card online called “Insta EMI card” through digital channels in October 2020. As of September 30, 2023, the active EMI card base was 4.19 crore of which the active Insta EMI card based acquired digitally was 42 lakh. In the half year ended September 30, 2023, on a monthly basis, BFL had issued approximately 220,000 Insta EMI cards.

 

As per BFL’s press release to the exchange, they do not expect any material financial impact on the company. Further, the company is in the process of implementing requisite actions to make good the deficiencies at the earliest, and will continue to engage with the RBI to ensure compliance on all parameters. The timeliness of resolving these issues and returning to business-as-usual will be a key monitorable.

 

CRISIL Ratings believes that the EMI Card is a key component of BFL’s origination strategy as it makes it easy for the card holders to obtain new loans and also helps to reduce loan origination costs. At an overall level, existing customers contributed to 59.8% and 60.9% of new loans booked by volume for the half year ended September 30, 2023 and full year fiscal 2023, respectively. The company has taken steps to quickly roll out alternative processes to the EMI card. The extent of impact on disbursements and fee income, if any, is likely to be evident over the next 1-2 months and remains a key monitorable.

 

CRISIL Ratings has also taken note of the recent measures by RBI covering the banking and NBFC sector. Firstly, on the asset side for NBFCs, there is an increase in risk weights for unsecured consumer loans (including credit card receivables), by 25 percentage points to 125% from 100% earlier. This regulation applies to all retail loans except housing loans, vehicle loans, educational loans, loans against gold and microfinance/SHG loans. The increase in risk-weighted assets will lead to a decrease in the capital adequacy ratios. The extent of impact will be linked to the share of unsecured loans in the overall AUM mix. For BFL, CRISIL Ratings estimates impact in the range of 240 to 270 bps. Supported by the recent capital raise, the impact on overall capital adequacy ratio is not material.

 

Secondly, there is an increase in risk weights for Bank’s exposure to NBFCs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%. Herein, loans to HFCs, and loans to NBFCs which are eligible for classification as priority sector are excluded. This development may potentially lead to an increase in cost of bank borrowings for NBFC sector. However, the extent of balance sheet impact will be linked to the share of bank borrowings in the overall mix. On standalone basis, around 20% of BFL’s borrowings are in the form of bank loans. Hence, the extent of direct impact is likely to be minimal. Neverthelss, focus on diversification in the borrowings mix with higher share of capital market instruments and securitisation, amongst others is expected to continue.

Analytical Approach

CRISIL Ratings has analysed the consolidated business and financial risk profile of BFL and its wholly owned subsidiaries (Bajaj Housing Finance Limited and Bajaj Financial Securities Limited) together referred to as the Bajaj group. Further, CRISIL Ratings has factored in its strategic importance to its ultimate holding company Bajaj Holdings and Investments Ltd (BHIL), and parent Bajaj Finserv Ltd (Bajaj Finserv).

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

* Large, well-diversified NBFC

Bajaj Finance has emerged as one of the largest retail focused NBFCs in India and continues with its two-pronged strategy of building scale and maximise profit. Segments such as mortgages, small business loans, and commercial lending are focused on building scale, while consumer durable loans, personal loans, and 2 and 3-wheeler financing are focused on ensuring profitability.

 

The assets under management (AUM) for the Bajaj group continued the growth trajectory and stood at Rs 290,264 crore as on September 30, 2023, as against Rs. 247,379 as on March 31, 2023 and 197,452 as on March 31, 2022. This growth has been broad based across segments with the AUM consisting primarily of mortgages (loans against property [LAP] and home loans including LRD (7%), personal and consumer durables loans (28%), SME loans (13%), two- and three-wheeler financing (6%), rural financing (9%), loan against securities (5%) and others (4%). Given the strong growth in the mortgages business, BHFL accounted for almost 28% of the AUM.

 

Even at a standalone level, the AUM growth has been resilient with AUM at Rs 214,891 crore as on September 30, 2023 as against Rs. 180,999 crore as on March 31, 2023 and Rs. 146,743 as on March 31, 2022. This comprised primarily of personal and consumer durables loans (37%), mortgages (loans against property [LAP] and home loans including LRD (9%), SME loans (18%), two- and three-wheeler financing (8%), rural financing (12%), loan against securities (7%) and others (9%).

 

At an overall level the composition of the portfolio over the years has tilted towards more of the secured book with the secured book accounting for over 53% of the AUM as on September 30, 2023, as against sub 50% four fiscals earlier.

 

CRISIL Ratings expects the growth momentum for the group to continue going forward, with the share of secured portfolio being in the range of 55-60% over the medium term.

 

* Strong capitalisation levels

Capitalisation is robust, with sizeable consolidated networth of Rs 59,874 crores and adjusted gearing of 4.3 times as on September 30, 2023. As on the same date, the standalone networth stood at Rs 56,037 crore with adjusted gearing at 3.5 times. The group adopts a conservative gearing policy. Despite the strong growth registered in the past five fiscals the adjusted gearing has been below 6 times. Each time the gearing metrics have inched closer to 6x, capital raising plans have been initiated and concluded. This is supported by timely and regular equity raise as well as strong internal accruals.

 

BFL recently in November 2023 raised Rs.8,800 crores and Rs.1,188 crores (Rs 297 crore received) through a qualified institutions placement and preferential issue respectively. Factoring in this equity, based on September 30, 2023 financials, the gearing levels have reduced to 2.9 times and 3.7 times on standalone and consolidated basis respectively.

 

The healthy capitalisation enhances the ability to absorb potential losses on its portfolio; adjusted networth to net NPAs was healthy, at 67 times as on September 30, 2023 (66 times as on March 31, 2023) on a consolidated basis and at similar levels on a standalone basis as well.  

 

CRISIL Ratings expects the capital profile for the company to remain comfortable over the medium term, supported by regular capital infusion, demonstrated ability to raise capital, and healthy internal cash accruals; thus, providing cushion against asset-side risks.

 

* Healthy earnings profile

The earnings profile of the group is supported by a large proportion of high-yield businesses and competitive borrowing costs. At a consolidated level, for fiscal 2023, the return on managed assets (ROMA) remained healthy at 4.6% against 4.1% for fiscal 2022. At a standalone level too, the ROMA remained healthy at over 5.3% for the fiscal 2023 as against 4.1% for fiscal 2022. For H1 of fiscal 2024 too, the RoMA strong at 4.6%(annualized) on a consolidated basis and 5.1%(annualized) on a standalone basis.

 

The earnings profile is also supported by higher fee income and comfortable net interest margins. Additionally, the company has increased efforts to diversify earnings by focusing on various fee-based income avenues, such as existing member identification cards, co-branded credit card and third-party product distribution. The earnings profile in fiscal 2023 has been supported by lower provisioning expenses of Rs 3190 crore against Rs 4,622 crore in fiscal 2022. This implied a credit cost of around 1.3% for fiscal 2023 (as against 2.4% in fiscal 2022). The same for H1 of fiscal 2024 too remained contained at 1.4%(annualized).

 

Nevertheless, earnings remain susceptible to high credit costs, especially during continued macroeconomic stress, despite the conservative provisioning policy. With CRISIL Ratings-adjusted provision coverage ratio at 67% as on September 30, 2023, the coverage was in line of that of peers. While BFL's profitability may moderate, it is expected to remain better than that of peers over the medium term.

 

* Strategic importance to the ultimate holding company BHIL, and parent Bajaj Finserv

BFL is strategically important to the Bajaj group, the company gets significant financial, managerial and operational support from its parent, Bajaj Finserv. BFL is one of the crucial entities of the group's financial services business, and its established track record of profitable growth enhances its strategic importance. CRISIL Ratings believes BFL will continue to derive on the benefits and synergies from the overall Bajaj group.

 

Bajaj Finserv's financial flexibility has steadily improved over the years supported by performance of its operating companies including insurance ventures. In the unlikely event of BFL requiring group support in an extraordinary situation, Bajaj Holdings and Investment Limited has ample liquidity in the form of cash and bank balances and portfolio of quoted investments to address the requirements. In addition, CRISIL Ratings believes that there is sufficient flexibility inherent in the market standing of the various listed and unlisted financial services firms in the group. CRISIL Ratings also believes that financial flexibility will be sufficient to support any material requirements of BFL even if the group were to step up its stake in the insurance ventures.

 

Weakness:

* Focus on risky asset classes and under-seasoned mortgage loan book

On a consolidated basis, reported gross non-performing assets (GNPA) stood at 0.91% as on September 30, 2023 as against 0.94% as on March 31, 2023 and 1.73% as on March 31, 2022. At a standalone level, the GNPA remained comfortable and stood at 1.14% as on September 30, 2023. Further, on standalone basis, the company has done one-time principal write-off of ~Rs 3,327 crore in fiscal 2023 as against Rs 4,738 crore in fiscal 2022. The write-offs for H1 of fiscal 2024 were Rs 1050 crore.

 

However, the company has high exposure to asset segments such as personal loans and consumer durable loans (including life-style and digital loans, which constituted around 49% of its standalone loan portfolio as on September 30, 2023, which are vulnerable to economic cycles. Further, BFL offers flexi loans option which has moratorium on repayment of principal across segments including consumer B2C, SME and Mortgages.

 

The company's ability to manage asset quality metrics going forward while continuing to scale up operations remains a key monitorable.

Liquidity : Superior

The liquidity profile of BFL on standalone basis is comfortable with positive cumulative mismatches across all short term ALM buckets (upto 1 year) in the asset liability statement as on September 30, 2023 with exclusion of committed lines in inflows. The liquidity position for the company too remains comfortable. As on September 30, 2023, BFL had total debt repayments of Rs 37,381 crore till December 31, 2023. Against this, they had liquidity (in the form of cash, equivalents and unutilised working capital lines) of Rs 27,765 crore excluding collections. Liquidity profile is also further supported by collections of approximately Rs 16,000 crore for each month.

 

ESG Profile

CRISIL Ratings believes that BFL’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on environment.

 

BFL has an evolving focus on strengthening various aspects of its ESG profile.

 

Bajaj Finance Limited’s Key ESG Highlights:

• BFL has constituted an executive ESG committee led by Deputy-CEO for implementing and monitoring ESG related aspects.
• BFL through its lending practices is largely retail focused and has been enabling financing to new to credit customers, rural areas, for women empowerment and strives to provide sustainable livelihood related financing products for its customers including MSME financing.
• The company has been doing CSR activities on a continuous basis which include Healthcare programs, Primary education initiatives, program to build BFSI skills to fresh graduates, shelters for underprivileged and orphan children. 
• Majority of the board members are independent directors, with segregation in chairman and executive position. BFL has a dedicated investor grievance redressal mechanism.

 

There is growing importance of ESG among investors and lenders. BFL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Outlook Stable

CRISIL Ratings believes Bajaj Finance will remain strategically important to, and continue to receive support from, the Bajaj group. The company will also sustain its healthy financial risk profile

Rating Sensitivity factors

Downward factors:

• With the current AUM mix, any significant deterioration in asset quality translating into pressure on earnings profile thereby leading return on assets to drop below 2.0% on a sustained basis. This excludes any significant change in AUM mix due to an increase in the secured portfolio that will inherently impact return on assets negatively.
• Significant increase in consolidated leverage metrics

About the Company

Set up in 1987, BFL is a subsidiary of Bajaj Finserv (52.8% ownership), the financial services arm of the Bajaj group. BFL has a diversified product suite comprising key businesses such as vehicle loans (2- and 3-wheelers manufactured by Bajaj Auto), consumer durable loans, personal loans, mortgage loans, small business loans, loans against securities, commercial finance, and rural finance

Key Financial Indicators

As on / for the period ended (Standalone)	Unit	Sep 30, 2023	Mar 31, 2023	Mar 31, 2022	Mar 31, 2021
Total Assets	Rs crore	252,497	216,525	168,016	138,339
Total income (net –off interest expenses)	Rs crore	15,711	26,401	20,298	16,100
Profit after tax	Rs crore	6,065	10,290	6,350	3,956
Gross NPA	%	1.1	1.2	1.7	2.2
Gearing	Times	3.5	3.1	2.9	2.8
Return on managed assets	%	5.1*	5.3	4.1	2.8

*Annualised

Any other information: Not applicable