Analyst Call Tracker | Street bullish on Bajaj Finance despite RBI’s risk-weight norms, ban on products

Despite this positive sentiment, Bajaj Finance's share price has witnessed a decline of over 13 percent in the past month, against a 1 percent decrease in the benchmark Sensex.

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Bajaj Finance’s equity raise to offset RBI’s risk-weight norms, say analysts

In mid-November 2023, the RBI announced measures to curb the unbridled growth in select segments of consumer credit, especially unsecured lending by banks and non-banking financial companies (NBFCs). These measures included the imposition of higher risk weights for ‘qualifying loans’ of commercial banks and NBFCs by 25 percentage points each and an identical hike in risk weights for on-lending by banks to NBFCs.

HDFC Securities’ analysts upgraded Bajaj Finance from 'add' to 'buy', setting a target price of Rs 8,650 per share. They acknowledged that while the RBI's directive on higher risk weights for consumer credit could affect Bajaj Finance's capital adequacy ratios (CAR) (with an estimated 250 basis points (bps) impact on Tier-I at a standalone level), the company's recent equity raise (equivalent to around 17 percent of FY23 net worth) is expected to counteract this impact, allowing for ample growth opportunities.

“We expect Bajaj Finance to follow through and gradually re-price its asset side of the balance sheet to absorb the impact of higher risk weights,” the brokerage firm noted.

RBI’s embargo on Bajaj Finance’s e-com and insta EMI card may be temporary

Apart from that, the RBI ordered Bajaj Finance to stop issuing new loans through its 'e-com' and 'Insta EMI card' due to non-compliance with digital lending guidelines, particularly the non-issuance of Key Fact Statements (KFS) to the borrowers under these two lending products.

The central bank introduced the Digital Lending norms in September 2022 to curb unscrupulous growth in instant digital personal loans and to strengthen customer protection.

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Nevertheless, analysts believe that the RBI's instruction to suspend loan disbursals under Bajaj Finance's e-com and Insta EMI card categories is unlikely to significantly impact earnings in the short term. These segments collectively contribute approximately 12-13 percent of disbursement volumes and around 4 percent of disbursements by value.

“Our base case forecasts currently assume a couple of quarters of embargo, which is likely to reflect in little impact on FY24 growth. However, we expect lower headline growth to be offset by better pricing environment on the back of relative easing in competitive intensity,” said analysts at HDFC Securities.

Bajaj Finance Q3 scorecard

Bajaj Finance posted a smaller-than-expected rise in third-quarter profit for a second straight quarter, as it set aside more money for bad loans. The company's consolidated profit after tax (PAT) rose 22.4 percent year-on-year (YoY) in Q3 FY24, while revenue from operations grew 31.28 percent YoY.

In Q3 FY24, gross non-performing assets (NPA) and net NPA stood at 0.95 percent and 0.37 percent, respectively, against 1.14 percent and 0.41 percent in the corresponding period last fiscal.

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