Bajaj finance, like most lenders, is set to face the severe uncertainty related to Covid-19 in the next few months. The extension of lockdown till May 31 will likely have further impact on customers’ ability to borrow more and repay existing loans.
There are a few key things one should not miss out in Bajaj Finance’s fourth quarter results that signal significant caution. The lender wants to avoid risky loans and preserve capital. The focus is on strengthening existing business rather than acquiring new. There is complete acknowledgement of the uncertain path ahead. To be sure, these are the keywords repeatedly heard in the Q4 conference calls of most banks over the past few weeks. Covid-19 has forced a radical change in business strategies.
Bajaj Finance has not offered loan moratorium to customers with loan over dues of 60-days. “As a matter of prudence, Company decided that a set of customers with 60 days overdue and high likelihood of moving into NPA should not be offered moratorium,” the company said. Except that, for most non-NPA customers, the lender has given moratorium. Takeaway—it does not want additional risks at this point. The Reserve Bank of India (RBI) permitted lenders to give moratorium on loan repayments for the March-May period in view of COVID-19.
Secondly, the company clearly expects a COVID-19 shock on business going ahead. It has set aside Rs 900 crore in the form of COVID-19 provisions. Significant provisions are funds set aside by lenders to cover potential losses. Loan losses and provisions (expected credit loss) for the quarter increased significantly to Rs 1,954 crore as against Rs 409 crore in Q4FY19. Message-there are no pretensions that all is going to be well ahead. COVID-19 is a clear risk factor.
Cost cutting on
There have been a set of measures taken to rationalise costs. The company has frozen all hirings till September, except in strategic positions, frozen advertising and promotions, travel, training and all other discretionary expenses till September 2020, has reviewed its temporary workforce and has optimised it in light of lower demand, (suggesting trimming of workforce). Also, it has temporarily suspended all new branch expansion till September 2020--the caution and cost-cutting is logical; preserving capital is the idea.
Since the lockdown began in late March, most of the economic activities have come to a grinding halt. So it is not surprising that Bajaj finance hasn’t done any auto loans in April and has put on hold all SME loans till lockdown is lifted. But the company is pinning its hopes for early recovery in rural markets to lift the sentiments.
“Rural is likely to recover the fastest as most of the locations are in green zones. Gold loan business is expected to see increased demand and Company has organised itself to capture incremental business opportunity,” said the company in the presentation.
This outlook is largely in tandem with economic theories that rural is going to take the lead for revival, rather than urban centres.
Despite the start of COVID-19impact in the March quarter, Bajaj Finance has done well on most financial parameters. A 19.4 percent decline in PAT is on account of higher provisions. New loans booked during the March quarter increased by 3 percent to 6.03 million, from 5.83 million in Q4FY19.
"Adjusted for lower acquisition due to lockdown, new loans booked would have grown by 21 percent to approximately 7.03 million," Bajaj Finance said. "Due to COVID-19 pandemic and the consequent lockdown, the company lost 10 productive days in Q4 FY20 resulting in lower acquisition of nearly 1.0 million loan accounts and lower AUM of approximately Rs 4,500crore," it explained.
Challenges on NPAs ahead
Bajaj Finance, like most lenders, is set to face the severe uncertainty related to COVID-19 in the next few months. The extension of lockdown till May 31 will likely have further impact on customers’ ability to borrow more and repay existing loans. The tight liquidity scenario will mean only stronger lenders will stay in competition.
According to Bajaj, as on May 15, the company has a consolidated liquidity buffer of Rs 20,900 crore and SLR investments of Rs 3,310 crore, representing 18.6 percent of its total borrowing.
“Given the environment, Company will continue to run high liquidity buffer, despite an impact on cost of funds in the short term,” the company said.
Bajaj Finance has relatively-healthy asset quality ratios at the end of March quarter with gross NPA at 1.61 percent. But, the sharp deterioration in economic conditions will likely take a toll on consumer confidence in the months ahead.
Rating agency, Moody’s has predicted significant weakening in asset quality of non-banking financial institutions (NBFI). According to the agency, NBFIs are more exposed than banks to the coronavirus-led downturn, given their focus on riskier segments, and in particular corporates and the real estate sector which were facing liquidity constraints even before the outbreak.Bajaj Finance is unlikely to be an exception.