Analysis| Bajaj Finance remains steady, cautious in COVID times

There are two key highlights of the Bajaj Finance Q1 numbers. One, the total Covid-19 provision has been increased significantly and now stands at Rs 2,350 crore as on June 30. This is about 11 percent of the total moratorium book, indicating that Bajaj Finance expects some pain ahead.

Two, the bank has brought down its moratorium loan book to Rs 21,705 crore or 15.7 percent of the assets under management (AUM) as at end-June from Rs 38,599 crore or 27 percent of AUM as of April 30, 2020. The company ascribed this to reduction in bounce rate coupled with better collection efficiency. This is good news.

This contingency provision together with existing expected credit loss provision of Rs 623 crore provides an overall provisioning coverage of 13.7 per cent on the consolidated moratorium book, the company said. Additionally, as a matter of prudence, the Company has also reversed Rs 220 crore of interest income from the interest capitalised during the moratorium period, it said.

Extra caution and decline in moratorium book are positive signals to Bajaj Finance investors in uncertain times. That is despite a 19 percent fall in net profit to Rs 962 crore in Q1 from Rs1195 crore in the year-ago quarter. The company made an additional COVID provision of Rs 1,450 crore in the quarter taking the overall contingency provision for COVID-19 to Rs 2,350 crore as of 30 June 2020.

Logically, the aggressive provisioning also indicates management expects asset quality issues going ahead. It has already acknowledged the tough business situation. “The Company's business operations in Q1 FY21 were considerably impacted due to COVID-19 pandemic and the consequent lock-downs which remained for most of Q1 FY21. It has resulted in significantly lower business acquisition and constraints on recovery of overdue from customers,” the company said.

The company booked just 1.75 million new loans in Q1 as against 7.27 million in the year-ago quarter.

There are no issues with asset quality at this point. Gross NPA and net NPA as of June 30, 2020, stood at 1.40 per cent as against 1.60 per cent as of June 30 last year. The provisioning coverage ratio was at 65 per cent. The cash surplus also remained healthy with overall liquidity surplus of approximately Rs 17,700 crore as of June 30 on a consolidated basis.

Generally, the April-June quarter was a tough one for most non-banking finance companies (NBFCs) except for gold loan lenders like Muthoot Finance. The Covid-19 impact continued to affect businesses causing income losses and prompting consumers to cut down discretionary spending further.

The uncertainty ahead on account of the COVID situation is hard to predict. The actual impact of COVID will reflect on the loan books once the moratorium period gets over by August 31. Unless the Reserve Bank of India extends the moratorium, most lending institutions are likely to witness high loan defaults. Bajaj Finance is less likely to get impacted compared to its peers due to its firm hold on asset quality. Even then, the COVID scenario is still evolving. One needs to wait and watch the second-quarter numbers for more clarity.