Slow growth in SME started before note ban: Sanjiv Bajaj

The SME sector continues to see the slow growth that was witnessed even after the note ban that was enforced last November, Sanjiv Bajaj, Managing Director of Bajaj Finserv.

Speaking to CNBC-TV18, Bajaj said that defaults on loans had gone up marginally before the third quarter and that Bajaj Finserv had tightened its credit policy in the first quarter itself, meaning that the bottom 20-25 percent of applicants did not get loans.

He said it would be important to see how SMEs adjust to demonetisation over the next two to three quarters, as the sector will have to turn more formal.Bajaj said sales were muted and that life insurance earnings continues to remain weak. He added, however, that consumer spending should come back to speed by March.In third quarter earnings released at the end on January, Bajaj Finserv said it had grown its consolidated net profit 41 percent year-on-year to Rs 614 crore, thanks to strong performance by its general insurance and NBFC subsidiariesOn rumours of a buyout of the Allianz Group's stakes in the insurance joint ventures, Bajaj said there was no change in the status quo and that the two “continue to be partners in building two high-quality businesses”. He said talk of a merger in the next financial year or later was merely speculative.Bajaj Finserv holds 58 percent in Bajaj Finance and 74 percent each in Bajaj Allianz General Insurance and Bajaj Allianz Life Insurance.Below is the verbatim transcript of Sanjiv Bajaj's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Latha: Let me start with one question that I didn’t ask you last time where the market cannot stop guessing, what is between you and Allianz, are you going to buy out anytime soon the Allianz group?A: Your guess is as good as mine. When my guess gets better, then a decision would be taken but there is no change from the last time that we have discussed. They continue to be partners, we continue to build two high quality businesses so there is no change right now.Latha: What will be the catalyst for this decision, will it be when you want money, will it be when Allianz will be tired of waiting, should we expect any change in ownership in FY18?A: That is speculative and it is not something that I have a clear answer for it at this stage. The only thing that I can say is as of now they are partners, as of now we are building the businesses together. Whether these things change, whether they change in FY18 or later, this would be speculative and I don’t have information to share there but when I do get it, we would share it with everyone.Sonia: The last time we spoke to you, you indicated that post demonetisation, normalcy in the industry could return by the end of March. The only space where we are not seeing any major recovery is the SME sector purely because it was more cash driven than others. What is your own anecdotal evidence suggesting in terms of where you are seeing recovery now and where there is still some time to go?A: There will be SME sector, we saw things being reasonably slow even prior to demonetisation from the early part of the year. So there were certain cities and segments where we started seeing our defaults, our bounces on payments go up marginally and as a result from Q1 itself, we tightened a credit policies. So the bottom 20-25 percent of people who we would have normally given a loan to, we cut that out.That is why, for us the impact in Q3 was not as much because we had already started taking that action. We continue to see slow growth over there and it will be important to see over the next two-three quarters how these SMEs adjust to the fact that there is still less cash in the system, there is a lot of pressure -- correctly so but there is pressure on them to move towards more formal methods of payment and you have to keep in mind that it is not only the individual desire of that SME, his chain works on cash. So we think that it still takes them a couple of quarters, there could be delayed payments towards that end, we have made slightly higher provisioning on our SME book just to be on the safe side.So this is something which I would wait till Q2 of the next financial year. On the other hand, our consumer side were very clearly other than the motorcycle sales where we cater to a large number of lower income people, so that still continues to be slow and hence the financing continues to be slow but our other segments are now inching up in January and that is where we have greater confidence to say that by March, the consumer financing should come back.Anuj: So for consumer finance in particular, is the latent demand strong enough to compensate for one-two months hit that you would have taken, is that the sense you get looking at the last few days numbers?A: If you look at consumer durable sales, if you expand that to other categories, sales have not gone up significantly, so sales are muted and sales for last couple of years have been muted. First half of this year grew 6-7 percent to consumer durable -- if I have my numbers right -- after a couple of years and that is what improved.For us, our diversified lending strategy where we are financing across multiple categories not just consumer durables but we are doing fitness equipment, we are doing watches, we are doing -- for example groceries at Big Bazaar -- we are doing t-shirts at US Polo. So we have expanded the categories and this is allowing us to keep our growth. So it is not that the underlying segments are growing as much. We are growing because we have expanded our categories knowing that we will otherwise get to saturation very soon.Anuj: No question of Allianz buying more stake because I thought they had the right of first refusal and with the FDI rules allowing more foreign stake in insurance, did they have ever a right to buy your stake?A: That is the question that is again under debate because that was subject to three-four things. As I said there are multiple discussions that have happened between them and us on this so I cannot comment beyond that.Those discussions have not been conclusive so far, they are happening at a very cordial manner because they could stay on, they could exit, so this is something that two partners have to take a call on and that is why it is best that we keep it as it is till we know something firm.Latha: I am not saying that they will kill the goose that lays golden eggs.A: They cannot and they have been very strong, very fair partners for 15 years. So there is no worry on any of those issues.Latha: The regulators rules were only on the pricing at which they will get the stake or they will exit but there are no regulatory rules on preventing them from staking a claim that as and when the rules change, we will get a stake. Was that part of the agreement?A: I cannot be get into more at this stage on that because there are discussions going on.Sonia: Coming back to the spending patterns etc, almost 70 percent of your portfolio is to the salaried class. I wanted to understand from you what the recovery is over there, both in terms of discretionary spending as well as -- you were talking about the new segments that you are getting into -- have you seen any major recovery there or is it more to do with specific verticals like motor financing etc?A: Other than the two-wheeler financing, we are seeing numbers come up by and large close to normal and that is where I hope that by March, we will be at normal levels. When we look at -- consumer durable financing is coming back up to speed. If I look at the expanded categories, personal loans we do to salaried customers, home loans, all are coming back but I would not say they are at the same level at where we would expect them to be here.What you have to keep in mind that we are still growing. So month-on-month, you are still overall seeing growth. So it is a question of where you expect us to grow to. For example, if you look at our profit after tax (PAT) in Bajaj Finance, first half of the year grew at 45 percent. Q3 was 36 percent. 36 percent is a great number but it is not 45 percent so it means there is some slowdown. I am hoping that by March, this part will at least come back to normal but we have to just wait and watch because everything is not in our control.Latha: I know that you are in the forefront of applying analytics. How much longer can you maintain this frenetic pace, 35-40 percent rate of growth, does analytics give you that visibility for next two-three years?A: There are two-three parts to this. One is that we always say 20-25 percent growth is something that we see as stable medium-term growth because we know that we will cut down business where we see greatest stress on the market. So we are first a risk company not first a lending company and that is part of the reasons why we have grown slower in Q3 as well. We took some of those steps even prior to demonetisation but we have been lucky that diversified lending strategy is helping us and we have many more things in line giving us that kind of growth. So that is first part.Second where analytics is helping us, is not only with new customers where we are able to run the whole bunch of risk analytics on what kind of risks we are taking on these customers when we give an instantaneous loans but Bajaj Finance itself sits now on 20 million customer datapoints, unique customers and cross-sale is a very significant part of what they will do and this is where we get that additional growth. So for example, this year we may end this year with 9-10 million loans. 60 percent of those are to existing customers and that is a huge benefit.So very early on -- we said that cross sale is a very important part of our strategy not only because it cuts acquisition cost but also because it creates a relationship with our customers which otherwise a bank would have one and NBFC would not have one. This is where analytics is playing a strong role.The third point, I would say is that the fact that we are in four different product lines now, across five different segments is what is helping us grow as well.