Stress rises for Bajaj Finance in Q1, but payment plan sparks excitement

Consumer lender Bajaj Finance Ltd may have dodged second wave growth, but the resurgence of the pandemic has significantly affected asset quality. This puts the lender’s valuation at risk as its stocks have outperformed the broader market since April.

Bajaj Finance reported an increase in gross bad debt for the June quarter, with the severity of the pain focused on auto loans. Gross bad debts represented 2.96% of the portfolio, up sharply from 1.79% in the previous quarter. Bad debts in the auto finance portfolio jumped nearly 20% from 9.3% in the previous quarter.

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Second stage assets as a percentage of loans in the two- and three-wheeler loan portfolio remained high at 16.35%

Borrowers of all categories have shown increased stress. Assets classified in the second stage, where two repayment deadlines are overdue, also increased sharply. Here, small business loans and auto loans have been the most painful.

Second stage assets as a percentage of loans in the two- and three-wheeler loan portfolio remained high at 16.35%. Business and consumer (B2C) loan ratios increased to 3.78% and the rural segment more than doubled to 3.59%.

The spread and virulence of the second wave was more pronounced in rural centers and the impact is visible on Bajaj Finance’s portfolio. In view of the uncertainty, management has refrained from giving clear indications of future stress. Even its digital pledge to bring the gross bad debt rate down to 1.7-1.8% by March hinges on the lack of a third wave.

Certainly, the company is committed to protecting its balance sheet and may resort to more provisions or write-offs to reduce bad debts, management said in a conference call with analysts on Tuesday.

On the bright side, the lender saw an improvement in repayments in July. “July seems to be in phase with March; actually better than March. If the blockages do not recur, we are in a better position to handle the situation, ”said Rajeev Jain, managing director, on the call. The result, however, is that investors in Bajaj Finance must prepare for a period of prolonged stress.

The growth picture is not alarming. Admittedly, the impact on the growth of assets under management (AUM) is more moderate than last year, but the recovery in the March quarter was halted. But the growth in assets under management is only 4% on a sequential basis and the increase in customer base has been lower.

The impact on growth was pronounced primarily because the business-to-business (B2B) segment was hit the hardest, according to Jain. Analysts believe that blockages, even localized, pose a significant risk to the growth of the lender. The recovery here depends purely on the potential impact of the third wave.

The pandemic may have affected Bajaj Finance’s performance, but the lender continues to focus on a longer-term goal of entering the payments arena. The lender announced in January 2020 that it would venture into the payments space, currently occupied by large companies such as Alphabet Inc., Flipkart and One97 Communications Ltd. Management said that work on Bajaj Pay, which will be a single point of access to a multitude of payment solutions, is expected to launch in October.

Jain said Bajaj Finance is not too worried about the existing competition. “We don’t have a customer acquisition problem. We are fully KYC. Our goal is commitment, ”he said.

While the pandemic will determine whether investors favor Bajaj Finance, the lender’s payment cap may add some excitement.

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