Rating Rationale

Strengths
* Large, well-diversified NBFC
Bajaj Finance has emerged as one of the largest retail asset financing NBFCs in India, and continues with its two-pronged strategy of building scale and maximising 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 maximising profit. As on December 31, 2017, assets under management (AUM) grew 34% (year-on-year) to Rs 77,236 crore and consisted primarily of mortgages (loans against property [LAP] and home loans; 23%), personal and consumer durables loans (30%), business loans and vendor financing (15%), loan against securities (7%), 2- and 3-wheeler financing (8%) and others (17%).

The LAP book remained almost stable owing to shift in the company's stance of direct sourcing of customers and maintaining a cautious view on the sector. All other segments witnessed growth.

* Strong capitalisation
Capitalisation is strong, with sizeable networth and adequate Tier-I capital adequacy ratio of Rs 15,793 crore and 19.61%, respectively, as on December 31, 2017. To support medium-term growth plans, in November 2016, promoters infused Rs 306 crore through conversion of warrants. Gearing policy is conservative. Adjusted gearing has been below 6 times over the past five years, despite aggressive growth in AUM. Despite strong growth plans, capitalisation should 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
Earnings are supported by a large proportion of high-yield businesses and competitive borrowing costs. In the first nine months of fiscal 2018, return on managed assets (annualised) remained healthy at 3.3% (almost similar to the corresponding period of the previous year), driven by higher fee income and a stable net interest margin. Profitability continued to be better than the industry average. Additionally, the company has increased efforts to diversify earnings by focusing on various fee-based income avenues, such as existing member identification cards and third-party product distribution. Earnings remain susceptible to high credit costs, especially during continued macroeconomic stress, despite the conservative provisioning policy. With CRISIL-adjusted provision coverage ratio at around 68% as on December 31, 2017, the coverage exceeded that of peers. While Bajaj Finance's profitability may moderate as the proportion of mortgage loans increases under it's housing finance subsidiary, it will remain better than that of peers over the medium term.

* Strategic importance to, and strong expectation of support from, the Bajaj group
Bajaj Finance is strategically important to the Bajaj group, and gets significant financial, managerial, and operational support from parent, Bajaj Finserv. It also derives synergies from being a captive financier for Bajaj Auto Ltd (Bajaj Auto; 'CRISIL AAA/FAAA/Stable/CRISIL A1+'). Bajaj Finance 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. Bajaj Finance also plays a critical role in helping Bajaj Auto meet sales targets and maintain market share; it financed approximately 37% of Bajaj Auto two wheelers and approximately 28% of Bajaj Auto three wheelers sales volume in fiscal 2017, against 20% in fiscal 2010.

Bajaj Finserv's financial flexibility has improved steadily over the years, supported by the performance of its operating companies, including insurance ventures. In the unlikely event of Bajaj Finance requiring group ;support in an extraordinary situation, BHIL has ample liquidity in the form of cash and bank balance and portfolio of quoted investments to do so. In addition, CRISIL believes there is sufficient flexibility in the market standing of the listed and unlisted financial services entities of the group, which will be sufficient to support any material requirement of Bajaj Finance even if the group were to step up its stake in insurance ventures.

Weakness
* Focus on risky asset classes and under-seasoned mortgage loan book
In recent years, risk management processes and data analytics capability have been strengthened. Underwriting norms and monitoring mechanisms in small and medium-sized enterprise (SME) business segments such as business loans and LAP have been reinforced. The unsecured lending business (mainly consumer durables financing and personal loans) has also been supported through investments in risk analytics and technology. Underwriting and collection norms have been tightened based on portfolio performance trends and early warning indicators. The company has slowed growth in the LAP business in recent years due to intense competition and is likely to continue to adjust growth plans across business segments in response to market opportunities and challenges. It has revamped its business model in the SME segment and now focuses on sourcing business through cross-selling to existing customers to support growth. Diversified loan book and increased focus on risk management and data analytics helped manage asset quality risks in the past few years and will continue to do so. Asset quality remains stable with gross non-performing assets and net non-performing assets (90+ days past due [dpd]¹) at 1.67% and 0.53%, respectively, as on December 31, 2017.

The increased focus on risk management should mitigate the inherent asset quality risks following the high growth in recent years and focus on risky asset segments. A significant proportion of Bajaj Finance's portfolio comprising mortgage loans has witnessed strong growth over the past few years and remains under-seasoned. Additionally, the company has high exposure to risky asset segments such as personal loans and consumer durable loans, 2- and 3-wheeler finance, and unsecured business loans, which constituted around 51% of its loan portfolio as on December 31, 2017, and are vulnerable to economic cycles. Furthermore, competition, especially in the retail and SME financing business, has intensified significantly with increased focus by private and public sector lenders and the entry of new banks. However, the share of secured assets segments, such as mortgages, is expected to rise over the medium term, which will help improve asset quality.