REPORT ON BAJAJ FINANCE

Group 1 Crew 2

Submitted by

Abhik Banerjee
Agadh Gupta
Abhishek Singh
Aishwarya Verma
 BAJAJ FINANCE

1. HISTORICAL BACKGROUND
Set up in 1987, Bajaj Finance Limited is a non-banking finance company (NBFC) and is a
subsidiary of Bajaj Finserv (55% ownership), the financial services arm of the Bajaj Group. The
company is engaged in lending and allied activities with focus on consumer lending, small and
medium enterprises lending (SME), rural lending, fixed deposits and value added services.

Historical Timeline
So major Landmark events in the company history are as follows:

Initially named as Bajaj Auto Finance Ltd, the company was incorporated on March 25, 1987 as
a private limited company. It became a deemed public company on 20 October 1987 u/s 43A(1)
of the Companies Act 1956. Over the years the company came out with an initial public offering
and got listed on Bombay Stock Exchange and National Stock Exchange. In order to offer
various finance schemes the company expanded and opened many branches in various locations
throughout the country. During the years 1991-95 the company opened their branch offices at
Hyderabad, New Delhi, Chennai, Bangalore, Mumbai, Nagpur, Vijaywada, Nasik,
Vishakhapattanam, Kolkata, Goa, Madurai and Pune.

On 5 March, 1998 Bajaj Auto Finance registered with RBI as a Non-Bank Company. During the
years that followed from 1998-2003, the company expanded its reach to various places like
Chandigarh, Cochin, Indore, Ludhiana, Surat Kolhapur Bhopal Bhubaneshwar Calicut Erode
Jalgaon Jullundhar Kanpur Lucknow Raipur Rajkot Salem Solapur Udaipur Tirupati Amaravati
Amritsar Bhavnagar Durgapur Jamshedpur Jodhpur Kopergaon Mehsana Mysore Siliguri and
Vellore, Baroda and Trivandurm. The company also started venturing in financing personal
computers in 2004.
During the year 2005-06 the company opened Loan Shoppes with a view to enhance their direct
marketing activity and their brand awareness. They opened 22 shoppes and 14 new branch
offices during the financial year. Thus due to vast expansion over the years, by the end of the
year, the total number of branches has gone up to 113 and now Bajaj Auto Finance covered 280
towns through its vast branch network. By 2007-08 they had launched IPO financing for high
networth customers, acquisition of AAA rated securitization transactions, personal loan, cross
sell program to their existing customers and financing for personal computers to SMEs.

On 6 September 2010, the company rechristened itself to Bajaj Finance. The Bajaj Housing
Finance Limited (‘BHFL’ or ‘Bajaj Housing’) a wholly owned subsidiary of Bajaj Finance

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received certificate of registration on 2 October 2015 from the National Housing Bank to
commence housing finance business.

On 29 September 2017, BFL was included in the benchmark Nifty Fifty index of the top 50
stocks in India. BFL entered into a strategic partnership with One Mobikwik Systems Private
Ltd. (‘Mobikwik’) in August 2017, which enabled BFL to provide Debit and credit engagement
tool for its customers.

2. INDUSTRY DESCRIPTION

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act,
1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business
but does not include any institution whose principal business is that of agriculture activity,
industrial activity, purchase or sale of any goods (other than securities) or providing any
services and sale/purchase/construction of immovable property. NBFCs are rapidly gaining
prominence as intermediaries in the retail finance space.

NBFCs today finance more than 80 per cent of

equipment leasing and hire purchase activities
in India. The public deposit of NBFCs has
increased from US$ 293.78 million in FY09 to
Rs 409.15 billion (US$ 6,089.52 million) in
FY17, registering a Compound Annual
Growth Rate (CAGR) of 46.10 per cent.

The gross loans of India’s Non-Banking

Finance Company-Microfinance Institutions
(NBFC-MFIs) has recently increased 24 per
cent year-on-year to Rs 38,288 crore (US$
5.89 billion). Also their market share in
commercial lons has seen a rise to 2.8% in
2016-17 from 2% in 2015-16

NBFCs have thus served the unbanked

customers by pioneering into retail asset-backed lending, lending against securities and
microfinance. NBFCs aspire to emerge as a one-stop shop for all financial services. Non-
Banking Financial Companies are expected to raise their share to 19-20 per cent by 2020 through
recapitalisation program for public sector.
Also the banking license-related guidelines issued by RBI in early 2013 have now placed NBFCs
ahead in competition for licenses owing largely to their rural network These New RBI guidelines

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on NBFCs with regard to capital requirements, provisioning norms and enhanced disclosure
requirements are now expected to benefit the sector in the long run

Two-thirds of India’s population lives in rural areas where financial services have made few
inroads so far. Rural India, however, has seen steady rise in incomes creating an increasingly
significant market for financial services. There are several standalone networks of SHG, NGO’s
and MFI’s in different parts of rural India. Cross-utilisation of these channels can facilitate faster
penetration of a wider suite of financial services in rural India. Increasing use of technology to
reach rural India is the paradigm-shifting enabler. Internet kiosk based channels are expected to
become the bridge that connects rural India to financial services. Rural credit segment is a large
market, which can be tapped by ensuring timely loans which are critical to agricultural sector.
Lastly with SEBI deciding to allow strategic investors such as registered Non-Banking Financial
Companies (NBFCs) and international multilateral financial institutions to invest upto 25 per
cent of the total offer size of Real Estate Investment Trusts (REITs) and Infrastructure
Investment Trusts (InvITs) can turn out to be quite a positive move in the future.

Reference: IBEF July sector report

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 2. COMPANY DESCRIPTION

Bajaj Finance Limited is a non-banking finance company (NBFC). The Company is engaged in
lending and allied activities. It focuses on consumer lending, small and medium-sized enterprises
(SME) lending, commercial lending, rural lending, fixed deposits and value-added services.

Bajaj Finance is the largest financier of 2-wheelers and consumer durables in India. Profit after
tax (PAT) was Rs 2647 crore on total income (net of interest expense) of Rs 8744 crore in fiscal
2018, against Rs 1836 crore and Rs 6100 crore,
respectively, the previous fiscal. In the first
quarter of fiscal 2019, PAT was Rs 834 crores
on total income (net of interest expense) of Rs
2502 crores compared to Rs 456.4 crore and Rs
1754.6 crores respectively during the
corresponding period of the previous fiscal.

BAJAJ
FINANCE The business model of Bajaj Finance Limited
Partner (BFL) is built on well-defined customer
segmentation, multiple product offerings
Comm Depo
E Rural ship & and extensive use of data analytics
ercial sits supported by robust risk management and
ure Securities Consumer Retail Services
Life a framework of operational excellence. It
Lending Durable Term Insurance focuses on six broad categories: (i)
ng • Large Loans Deposits Distributio consumer lending, (ii) SME lending, (iii)
Value • Digital • n commercial lending, (iv) rural lending,
1) Lease Product Corporate • General (v) deposits, and (vi) partnerships and
s Rental Term Insurance services.BFL enjoyed yet another strong
Loans
Discountin • Lifestyle Deposits Distributio year of performance aided by a
diversified product mix, robust volume
sio g Product n
growth, prudent operating cost and effective risk
) • Vendor Loans • Health
management.
Financing • Personal Insurance
• Financial Loans Distributio
Institutions Cross Consumer n Business
Lending Sell • Co-
• Light • Salaried With Branded presence in 793 locations and 59000+
Engineerin Personal active Credit distribution point of sale, it is one of the
g Loans largest loan Card acquirers in India (5.63 MM in Q1
Lending • Gold • Co-
• Specialty Loans Branded
Chemicals • Loans to Wallet
Lending Profession • Financial
• als Fitness 4
Corporate Report
Finance
•
Warehouse
Financing

FY19). The company is one of the largest personal loan, consumer electronics, digital products
& lifestyle products lender in India.

Payments
BFL’s EMI Card franchise has crossed 14.2 MM cards (CIF). For Payments the company has
formed partnership with Mobikwik that has 2.2 MM active wallet users as at 30 Jun 2018 who
have linked their EMI card to the wallet

Rural Business

It is one of the highly diversified lender in the rural locations offering 9 loan products in
consumer and RSME business categories with a unique hub and spoke business model. It has
Geographic presence across 693 towns and villages with retail presence across 10,100+ stores

SME Business
It is focused on affluent SMEs with an average annual sales of ₹ 10-12 Crores with established
financials & demonstrated borrowing track records. It offers a range of working capital products
to SME, full range of growth & working capital lending products to professionals (doctors, CAs
& engineers) & self employed professionals.

Commercial business
The company offers wholesale lending products covering short, medium and long term needs of
Auto component, Light Engineering and Specialty Chemical companies and Financial
institutions in India. They also offer a range of structured products collateralized by marketable
securities or mortgage.

Credit Rating
• Credit rating for Long Term Debt Program is AAA/Stable by CRISIL, ICRA, CARE & India
Ratings
• Credit rating for Short Term Debt Program is A1+ by CRISIL, ICRA & India Ratings
• Credit rating for FD program is FAAA/Stable by CRISIL & MAAA (Stable) by ICRA

Bajaj Housing Finance Limited

Bajaj Housing Finance Limited offers a full range of mortgage products such as Home Loans,
Loan against property and Lease Rental Discounting to salaried and & self employed customers.
It also offers inventory finance and construction finance to developers. The company has ₹ 7,272
crore of assets under management as of 30 June 2018, with a post tax profit of ₹ 2 crore for Q1
FY19.BHFL added ₹ 3,683 crore of assets under management in Q1 FY19. Capital adequacy
ratio of BHFL (including Tier II capital) stood at 28.54%

Credit Quality
• BHFL has zero GNNPA & NNPA as of 30 June 2018

Credit Rating
• Credit rating for Long Term Debt Program is AAA/Stable by CRISIL & India Ratings
• Credit rating for Short Term Debt Program is A1+ by CRISIL & India Rating

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Source: Investor Presentation

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Q1. Suggest a business strategy for the company?

The present strategy for Bajaj Finance:

The present strategy of the company is divided into the following parts:

 Diversified lending model with a focus on retail business: The Company is a

diversified NBFC and offers a wide range of financial products through its four lending
verticals including: Consumer Lending, SME Lending Commercial Lending and Rural
Lending. The company has developed a wide array of products within each vertical. The
company has been successful in growing a number of product lines. For example the
launch of three new products such as Financial Institutions Lending, Light engineering
Lending and Corporate Finance Loans.
 Pan India distribution network : The company has a strategic advantage over other
NBFC as it has a huge network of branches which include consumer usable stores, digital
product stores, lifestyle retail stores, auto dealerships etc both in urban as well as in rural
India.
 Strong credit evaluation and risk management systems: The Company exceeds most
of the regulatory norms laid out by the RBI relating to the provisioning of the delinquent
loans. The Company through its highly managed credit valuation system has been able to
keep its NPA level to a bare minimum.
 The Bajaj brand: Being a part of the Bajaj conglomerate has significantly contributed to
the recognition and growth of the businesses the company has invested into. The
company has consolidated its identity with the direct parent Bajaj Finserv under the
single brand name Bajaj Finserv.
 Effective use of technology and analytics to cross sell the products: The Company has
a customized platform for loan origination and credit underwriting which takes into
account the creditworthiness of the individual borrower. The company also has a data
analytics platform which analyses customer information and helps in originating new
loan products and cross selling the current products.
 Highest credit ratings: The Company has the highest credit rating in each category
which enables the company to borrow funds from various sources at highly competitive
rates. The current ratings of the company are summarized below :

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The following strategy is suggested for the company:

1. Focus on profitable growth of AUM of the company: the company needs to increase
its penetration through its diversified mix of products and by opening new branches. The
reasons for making this as a major strategy for the company is as follows :
i) The household appliance market is expected to yield a 9-11 % year on year growth in
terms of value
ii) Disbursements under the two wheeler segment are expected to grow at 18-20 % in the
financial year 2018 onwards
iii) Retail housing loans outstanding are forecasted to grow at 18-20 % CAGR in the
financial year 2019-20
iv) The MSME sector in India has a huge potential for the future

2. Continuation of Leveraging of customer base through cross selling: The Company has
been blessed with a number of loyal customers who the company hugely cross sells to and
they can continue to do so in the long run as well. The company has already engaged
relationship managers to look after a specific set of customers to increase retention of
customers and repeat transactions. This strategy would help the Company retain its customer
base without much efforts and they can use innovative procedures to add new customer base
in the meanwhile.

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3. Immense use of technology and Analytics: The Company has developed immense in-house
potential as far as analytics is concerned. The company has expertise in marketing analytics,
pricing analytics, service, risk, fraud and collections analytics. The company also has a
dedicated Business re-engineering team who are dedicated to improve the operational
efficiency of the Company. The company has plans to offer EMI cards digitally on a mobile
based application to reduce the cost of actual production of physical cards.
4. Broad Base the liabilities of the Company: The Company should essentially try to achieve
an optimal mix of funds while balancing the liquidity and concentration risks.
5. Utilize the efficiency of its subsidiary: The Company can gain some significant business by
making use of the inherent advantage of companies such as Bajaj Housing Finance which
being a registered HFC has great advantages such as increased leverage due to lower capital
adequacy norms and lower risk weights for certain classes of loans.
6. Continue to form partnerships and acquisitions of tech apps : The company needs to
maintain the edge by maintain the strategic partnerships it has with CRISIL and Future
Group and also needs to keep up the process of acquiring innovative products such as
Mobikwick which will further the company’s cause for digitization.

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Q2. How should it restructure its capital to survive?
Name Net Debt/EBITDA Net Interest Margin
Median 5.810942795 13.74116848
BAJAJ FINANCE LTD 7.281310236 9.860391853
SHRIRAM TRANSPORT FINANCE 5.853604758 8.994037459
MAHINDRA & MAHINDRA FIN SECS 7.161547154 8.678181223
MUANGTHAI CAPITAL PCL 6.170551651 21.0389856
SUNDARAM FINANCE LTD 5.768280831 29.85515198
BHARAT FINANCIAL INCLUSION L 4.753528005 13.74116848
MUTHOOT FINANCE LTD 3.91879451 14.80433239
SHRIRAM CITY UNION FINANCE 7.406941899 12.37301697
As an NBFC, Bharat Finance is one of India’s largest and fastest growing NBFCs. It is not in
dire straits and need not restructure for survival. It has mildly higher leverage than its peers and
slightly lower NIM than some of its peers.

However it has a cost of Funds which is 6.6% which is about 20 basis points above the MIBOR
and it is therefore very efficient in managing its cost of funds. The current industry source of
funds are as follows:

Industry ALM Bajaj Shriram Mahindra Muthoot Cholamandalam Average

Finance Transport and Finance Finance
Finance Mahindra
Financial
Services
Banks 31.04% 85.40% 30.36% 52.58% 39.40% 48%
NCDs 42.57% 44.08% 24.74% 31.90% 36%
Subordinate 6.40% 0.00% 5.28% 10.50% 6%
Debt
Deposits 12.29% 14.60% 7.86% 0.00% 2.00% 7%
CPs 5.98% 16.25% 13.25% 12% 12%
CBLO 1.72% 1.46% 4.14% 4.20% 3%

As can be seen here the only significant deviations for Bajaj Finance are in terms of the amount
of Bank Loans it has vs the amount of deposits it takes. Bajaj Finance pays a minimum interest
rate of about 7.5% across the fixed deposits it takes from customers whereas the Libor and Mibor
are lower than that and given the company’s excellent credit profile, they may be able to get
loans at lower rates thereby decreasing the interest burden. Therefore, in its current state, Bajaj
Finance can afford to slightly increase the amount of Funds it gets from Bank Loans. It may
slightly help reduce its cost of funds.

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Source: 1 CRISILl Credit Report

The change in capital structure and restructuring would be required in case Bajaj Finance moved
towards becoming a bank. As a bank BFL would be allowed to take Current and Savings
Account deposits from public which would be a very cheap source of funds at 4-5%. However, it
would be subjected to higher liquidity and other regulatory constraints. The overall lending rate
may also come down. Due to the strong consumer and retail led loan book of BFL and its
underlying fundamental tilt towards the consumer market this will enable it to see extremely fast
growth even as a bank. The classic funding structure of most banks has a CASA ratio upwards of
50-60%. The shift to a bank will require BFL to substantially increase the amount of deposits it
has.

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Q3. What would be advantages and disadvantages in converting itself to a bank?
Bajaj Finance had applied for a Banking License in 2013 and was rejected by the RBI. With the
change in RBI norms and the banking on tap facility and preference for financial corporates,
BFL is rethinking whether to apply for the license.

Bajaj Finance is the largest diversified NBFC and is currently a deposit taking NBFC (NBFCs-
D) where it is permitted to take deposits from public but it is subject to conditions like, it has to
give minimum interest rate of 5%, and the deposits can be of minimum 12 months and maximum
60 months. RBI doesn’t guarantee repayment of deposits by NBFCs, which means that investors
place deposits with NBFC at their own risk.

If Bajaj Finance moves to become a bank, apart from relaxation in accepting public deposits,
some other advantages for it would be:

 Cheaper Cost of Capital: Cheap funds are always a worry for NBFCs since they need to
depend on banks and other financial institutions for their funding requirements which at
times is costly. A bank can raise deposits from retail customers (public savings) which is
a lower cost of funding.
 Growth: Most NBFC think of becoming a bank as a natural transition, because banks
operate in a wider scope and the current market for Banks is larger than NBFC. Banks
also get more freedom to lever their balance sheet, since NBFC have the limit of leverage
of upto 7 times the equity capital .According to RBI notification RBI/2006-07/204, Some
of the restrictions on the activities of NBFC which can be pursued by Banks are:
o Bills discounted and rediscounted by NBFC, except rediscounting arising from
commercial and two and three wheeler vehicles
o Investment of NBFC both of long term and short terms
o Unsecured loans/inter-corporate deposits by NBFCs to/in any company
o All types of loans/advances by NBFCs to their subsidiaries, group
companies/entities
o Finance to NBFCs for further lending to individuals for subscribing to Initial
Public Offerings (IPOs).
o Bridge loans of any nature or Interim finance against capital issues.
o Should not enter into lease agreements departmentally with equipment leasing
companies as well as other Non-Banking Financial Companies engaged in
equipment leasing.
 Manage payment transactions: NBFCs are not allowed to manage payment
transactions, it would need to tie up with a payment bank in order to facilitate those
services to its customers.

Some of the disadvantages of converting to bank could be:

 Regulatory challenges: Bajaj Finance as a bank would have a maximum of 10%
shareholding of its parent company Bajaj Finserv (from now 62%), the board should have

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 majority of independent directors, and the bank would need to open 25% of its branches
in rural region.
 Requirements of a bank: As a Bank, Bajaj Finance would be subject to stricter
prudential norms of CRR, SLR, income recognition, asset classification and provisioning
norms on capital market exposures, single and group borrower limits, accounting and
disclosure norms and supervisory reporting requirements. Currently NBFCs are required
to maintain liquid asset of 15% of public deposits outstanding and invest no less than
10% in approved securities and an additional 5% in unencumbered term deposits, but the
most of the norms are applied with less rigor.
 Priority sector requirements to be maintained: RBI mandates banks to lend 40% of
their Adjusted Net Bank Credit (ANBC) to priority sector like small industries and
agriculture with mandatory allocation to some of the sections like small and marginal
farmers etc which may or may not have been part of Bajaj Finance’s growth plan as of
now. The current share of rural lending is at 7%, up from 1% in 2014-15, where the total
AUM is at Rs 5497 crore and in the normal course of being an NBFC they intend it to
increase to 9-10 % in the coming 3 years.
 Currently all loans to buyers of Bajaj auto are provided by Bajaj Finance, much the same
way as the finance arms of Hero and TVS, but once Bajaj finance gets banking license,
this competitive advantage might not stick and would erode Bajaj Finance’s competitive
Edge.
At the END OF 2016, Bajaj Finserv accepted that it still doesn’t know if it needs to go for a
banking license or not because with its current operations it is already bigger than most SCBs
and with the current financial infrastructure, with suitable tie ups it could end up providing 70-
80% services of the bank without even becoming one.

References:

RBI notifications on NBFC RBI/2006-07/204

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