MC EXCLUSIVE To be or not to be a bank: That's a question for Sanjiv Bajaj & RBI

Bajaj Finserv’s Chairman & MD Sanjiv Bajaj (Courtesy: (PTI photo)

Bajaj Finance had a loan book of Rs 4.62 lakh crore, growing at 24% y-o-y at the end of the September 30. In contrast Kotak Bank reported deposits of 5.3 lakh crore in September, and growing at 15% y-o-y. This means if Bajaj Finance were a bank today, will be the fifth largest private sector bank and may in a couple of years become the fourth largest if both Bajaj and Kotak maintain the same pace of growth as this year.

And by 2030 Bajaj Finance AUM will have grown to over Rs 10 lakh crore if it keeps to its guided growth pace of 20-22% per annum. The question before Bajaj Finserv and RBI is whether Bajaj Finance needs to become a bank.

"Will you be able to borrow wholesale on such a scale for such a size of lending? Don't you think you have to become a bank?," I asked Bajaj Finserv’s Chairman & MD Sanjiv Bajaj while interviewing him for our series 'Latha & The Leaders'.

"Not really," replied Sanjiv. "First, as per the laws of the country, we can't be a bank because business houses are not allowed to be a bank."

Further Sanjiv argued that the NBFC multi-tier model created by RBI defining Bajaj Finance and Bajaj Housing are upper layer, ensures adequate compliance. It enables NBFCs to borrow from debt markets, banks and via fixed deposits or debentures from retail investors. "I think if we continue doing that into the next decade, it should take us to the kind of numbers that you're saying," said Sanjiv.

But banks of his size have savings deposits coming at 3.5%, I persisted. Won't Bajaj Finance feel the pinch if doesn’t become a bank very soon? I asked. "Firstly, banks' average cost of borrowing is not 3.5%,", shot back Sanjiv. "Second, we compete in the consumer lending space, in the SME lending space, in the corporate lending space with the best of banks. If it was so obvious, we would not be doing and others would not be doing as well as they are. So everything is not just linked to a deposit," he argued.

"One of my few asks from RBI is," continued Sanjiv "like RBI provides a liquidity backstop to banks, you know, their lender of last resort. And for that, banks provide some security. My ask from RBI is they should offer this to the upper layer NBFCs too … Also, a few other areas around payments. If they equalize the norms over there, while protecting the small depositor and stuff with the banking license, I think you're creating a very viable financial services credit opportunity that India needs," said Sanjiv.

The RBI has historically been opposed to providing liquidity facility to NBFCs, Mutual Funds and other entities in the money market. Banks are provided liquidity backstop facilities because they take deposits from the lowest common denominator of savers, whom the RBI wants to protect. Banks also perform semi fiscal roles like lending mandatorily to the priority sector and providing basic banking facilities free of cost.

From the RBI’s angle, the preference is that large NBFCs convert themselves into a bank so that they are more rigorously regulated and yet RBI is averse to giving bank licences to conglomerates due to the obvious problem of connected lending.

Sanjiv Bajaj wouldn’t buy that argument.

Firstly what is a business house is a definition that's up for grabs, he said. Probably alluding to the fact that Bajaj Finserv has no crossholding with Bajaj Auto. Indeed Bajaj Auto has now set up its own finance company to lend to buyers of Bajaj 2-wheelers, since they find that Bajaj Finance doesn’t give their customers any preferential treatment.

Secondly, Sanjiv argued that even if NBFCs don’t directly take deposits, they borrow from banks, so instability in the NBFC sector can hurt bank depositors ultimately.

“Third is, to your own point on interconnected lending, ... today, I know what kind of monthly data dumps goes from us as an upper layer NBFC to the regulators. With AI, there is no reason why you cannot unearth Interconnected lending,” he told me.

To be fair, not just Sanjiv, a bunch of top corporate groups are keen on a banking licence. The fact that two large Japanese financial groups have picked up large stakes in a prominent Indian bank and NBFC, adds to their angst. If India needs to grow at 8-9% and become Viksit Bharat by 2047, who but Indian businesses will bring the capital, goes the argument.

Every RBI governor is confronted with this demand from business houses including the present governor Sanjay Malhotra and all his predecessors shied away from the idea for fear of interconnected lending. But Sanjiv Bajaj is bringing forth a fresh argument: that unlike in the past, with the coming of artificial intelligence, RBI may be able to unearth connected lending easily.

This argument is certainly worth debating. For if RBI’s supervision can be made so fool proof, then the country can have its cake and eat it too i.e. it can harness the capital of large business groups for banking capital and RBI can still save the economy from nepotistic lending, It will be interesting to see how this A.I. argument evolves.

For now, Sanjiv Bajaj is confident he can grow Bajaj Finance at the same furious pace that he has done in the past two decades, even without a banking licence.