India Needs Two-Three New Banks Every Two Years For A Decade: Sanjiv Bajaj
Those are hardly surprisingly words from Sanjiv Bajaj, as he joins a chorus of business and policy leaders who say India needs more banks, many more. At one time Bajaj, who leads one of India’s largest non-banking finance companies, was keen on a licence but the regulatory dice were loaded against business houses getting a bank licence. Now, one discussion paper proposes business houses be allowed to apply for licences, but Bajaj is circumspect. “Let the final rules come up, then we will see,” is all he’ll say about the aspirations of his own financial services group, led by Bajaj Finserv Ltd. He’s more forthright on what he thinks should be India’s banking ambition.
“I am firmly of this belief that in our country, if we really have to get that 10%+ GDP growth rate, we need two-three new banks every couple of years for the next decade and only then will we really take financial services to the masses.”
Bajaj offers the insurance industry as example. In 2000, when insurance opened up to the private sector, the total size of LIC, and then of the government non-life insurance business was Rs 10,000 crore each — it was a Rs 20,000-crore industry, he recounts. “It is an Rs 8-lakh-crore industry today with over 50 companies with significant increase in penetration and density of insurance and we still have so much to do. We are still nowhere near where we need to be in terms of insurance penetration, so the opportunity is still great.”
A lot of those licences went to business houses, some got into trouble; that is the nature of business, Bajaj argues. “You take risk, if there is fraud, please address it separately. Otherwise, encourage businesses to invest, to grow and accept failures, clean them out fast, so that businesses can reinvent themselves and move ahead.”
Insurance companies are permitted to lend up to 5% of assets within the group. Bajaj says he expects few companies would have lent even more than 1%.
“This hue and cry that you hear that business houses will misuse the licences, don't give it to the ones who you think will misuse the licenses. And, do you think those guys who will misuse the licenses, will misuse their own licenses? There are enough other banks for them to misuse and there are enough examples of that. I think we have to move away from crying wolf to deciding what we need to do for this country. Let's focus on that and then, act on that.”
Sanjiv Bajaj spoke with BloombergQuint ahead of Budget 2021 on his assessment of the economy and the outlook at Bajaj Finance. This is an edited transcript of the second half of that conversation.
One thing caught my eye in your Q3 earnings release and that is the kind of churn or attrition you've seen in your mortgage portfolio.
Mortgages disbursement was at 90% of Q3 FY20 level. However, AUM growth for the quarter was Rs 770 crore as against Rs 3,700 crore in Q3 FY20 due to significant portfolio attrition caused by pricing pressures.
In a very low interest rate scenario, do NBFCs still have an incredible, competitive edge?
Sanjiv Bajaj: That's a good question and that's why the answer to that is - what is the differentiation that an NBFC brings to a particular line of business versus a bank. If it's only going to be interest rate arbitrage, then when banks get into those lines of business it will get really tough for an NBFC. Now look at it this way, HDFC Limited is an NBFC, but it is the largest home financier competing with banks since inception. So, it's not that you can't build a differentiation but there are enough NBFCs that don't focus on building the differentiation, that don't focus on the customer service, they don't focus on the uniqueness of their product or service and they are the ones that will get hit. Because as it is obvious in the last few months, banks are not able to extend credit to most of the other lines of business. So as a result, they're going after some of the retail lines and they would cut rates more than most of the other NBFCs.
You said you will be taking “pricing actions to revert to pre-COVID growth levels by Q4/Q1”. So it's a race to the bottom right now?
Sanjiv Bajaj: Not really, in our case in none of our lines of business are we the lowest interest rate service provider but it does not mean that you don't stay within the range of interest rates at which a good quality customer will come to you. Otherwise, you will get adverse selection. So, when we see rates falling, we will also partly cut our rate but on the other hand there are a lot more intelligent, things that you can do to ensure that your book still stays not only of good quality and reasonably growing, but profitable as well. And I can't let out all the secrets.
Bad loans or Gross NPA ratio would have been 2.86% in Q3 if the Supreme Court status quo had been lifted, versus 1.34% in the preceding quarter. That's an almost doubling of bad loans. Does it get much worse from here on?
Sanjiv Bajaj: Hopefully not. As long as the pandemic does not throw up any nasty surprises, I would expect the worst to be behind us. As a company, we are very driven by the numbers that we see and that's why we are very transparent in sharing those numbers so that our investors can make their own calls. But as of now things are looking better than what we had expected. We were very conservative early on, we cut growth, we upped our collection efforts, we gave moratorium to customers that wanted it.
The good thing that we are seeing is that other than a small segment of customers who went through a tough period, and they are the ones that are contributing to the higher losses, many others have started coming back and paying. And new loans that we have given, the book that didn't exist prior to Covid, that book is operating at the same quality level as the pre-Covid book.
Which means inherently, we are still in a country where people want to pay, they are honest. Some of them have gone through a terrible time and we are part of the system that will have to absorb some of those losses, like the government is taking some, the individual is taking some, the financial services have to take the rest. But, incrementally, as of now, things are looking better.
So, bad loans are peaking out at 2.83 or 3% or so...nothing beyond that?
Sanjiv Bajaj: That's what it looks like as of now.
Your consolidated assets under management - AUM levels - are just about back to the December 2019 levels. You're roughly at Rs 1.43 lakh crore versus Rs 1.45 lakh crore. From here on what kind of growth do you intend to pursue? Because in the last 12 months, even pre-Covid, you had consciously cut back on growth, on lending. Here on, what kind of growth do you think you might be able to chase in the next 6 to 12 months?
Sanjiv Bajaj: That’s a little early to say that right now. I think by the end of Q4, we should be in a much better position to be able to talk about growth for the next year. Right now, we're still in a situation where we are coming close to normal. As I told you first quarter next year (FY22 Q1), we should be at a normalised level of volume compared to pre-Covid times. I guess right now there's still too many moving parts, but hopefully by the end of Q4, we should have a better sense.
Since we last spoke there have been two interesting RBI papers. One is an internal working group paper that recommends the opening up of banking licenses to business groups, like yours maybe. The second is a discussion paper by RBI on NBFC regulation. Not too many surprises there except that some of the things we've discussed in the past are not necessarily in the paper. Could you share your views on both?
Sanjiv Bajaj: The second one - as far as on the supervision, regulatory side, from what I've seen of this paper it’s been quite pragmatic and balanced. There are certain details on formulae based on that classification which when it comes out we will have a better sense. But directionally it is the correct thing to do.
Over the last decade, a large number of NBFCs today are much bigger than banks and yet we’re operating with very light regulatory supervision. That needs to change. However, we must also keep in mind that just putting the rules in are not good enough. Somebody needs to be supervising. Otherwise, we should not have seen the blow ups, not only in NBFCs but even in banks that have happened in the last couple of years. So, there is a responsibility to the regulator as well. I’m sure they understand that and the last couple of years has shown that weakness.
But this additional supervision was required for the large NBFCs. I think when you're small and medium, there should be a lot more flexibility so that it allows you to grow, it allows you to be innovative. And, once you come to a particular size, where you become important to the larger financial system, this is something that was required to be done.
As far as the first internal working group paper is concerned - because it's very much something that’s work in progress, that's why I've consciously not talked about it. Let's wait for the final rules to come out and irrespective of what Bajaj does, I am firmly of this belief that in our country, if we really have to get that 10%+ GDP growth rate, we need two-three new banks every couple of years for the next decade and only then will we really take financial services to the masses.
We have such a good example in insurance. In 2000, when insurance opened up to the private sector, the total size of LIC and of the government, non-life insurance was Rs 10,000 crore each - it was a Rs 20,000-crore industry. It is an eight-lakh crore rupee industry today with over 50 companies, with significant increase in penetration and density of insurance and we still have so much to do. We are still nowhere near where we need to be in terms of insurance penetration. So the opportunity is still great.
A lot of those licenses went to business houses, some got into trouble; that is the nature of business. You take risk, if there is fraud, please address it separately. Otherwise, encourage businesses to invest, to grow and accept failures, clean them out fast, so that businesses can reinvent themselves and move ahead. And we have seen that on the insurance side where the regulator even allows insurance companies, those that are part of a group, to lend up to 5% of the assets within the group. I don't think anybody has lent even more than 1%.
This hue and cry that you hear that business houses will misuse the licenses, don’t give it to the ones who you think will misuse the licenses. And, do you think those guys who will misuse the licenses, will misuse their own licenses? There are enough other banks for them to misuse and there are enough examples of that. I think we have to move away from crying wolf to deciding what we need to do for this country. Let’s focus on that and then, act on that.
Do these discussion papers, in combination, change your view on whether Bajaj would be interested in a bank license. Does it change your view or your interest in wanting to become a bank?
Sanjiv Bajaj: As far as the NBFC paper’s concerned, it makes us a lot more comfortable that NBFCs like us actually already meet most of the requirements of the new supervision. We already have those practices in place (and it) will now be a level playing field with many others that are not. So, we get even stronger as an NBFC. As far as the bank is concerned, let the final rules come up, then we will see.
On the NBFC framework - while it doesn't impose any substantive new capital requirements on large NBFCs like you, it also doesn't discuss any kind of liquidity backstop by the regulator. One of the things we've discussed over the last few years, as we've seen NBFCs in trouble, is that you believe RBI should make provision for such a backstop, at least for the top 10 largest NBFCs in the country. This paper doesn't address that, does it?
Sanjiv Bajaj: It’s been more on the supervision side. The good thing is that, through this pandemic as you know, RBI opened up a direct liquidity line to NBFCs. This was done after nearly a decade; it was last done I think in January 2009 after the last big financial crisis.
At least it shows now that RBI is willing to come in and help when externalities require that. Not when an individual NBFC is failing because of a poorly executed business plan or a poor business plan but when the system is under attack because of an external driver, that's a good point.
Now, from a general liquidity point of view, here I think what RBI should seriously look at for the large NBFCs is to provide them a liquidity window for which they need some security. That's why you have SLR with banks. Today, those NBFCs like us that have fixed deposit licenses, anyway have some money kept aside in SLR. But if those who want to access this additional window, require an SLR requirement there. If nobody accesses it you don't lose anything and those that put in some money into SLR and used this window, are the ones that are that much more robust, creating a robust financial services system. I don't know whether we see that or not but yes that was one of the points I hope comes up at some point.
(Last week, after this interview was recorded, at the time of announcing the monetary policy, RBI Governor Shaktikanta Das also announced that TLTRO operations will include NBFCs.)