A customer waits to deposit Indian 100 rupee banknotes at a counter inside a bank branch in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Bajaj Finance Sees ‘Large Growth Opportunity’ If Risk Ratios Remain Healthy

Consumer finance company Bajaj Finance Ltd. expects an income growth of least 22-23 percent this year.

“We remain in the business of risk, not in the business of lending. If risk metrics and ratios aren't representing a risk to us, the opportunity is very, very large,” Bajaj Finance Managing Director Rajeev Jain told BloombergQuint in a post-earnings interaction.

The Pune-based non-banking finance company reported an 81 percent year-on-year jump in its net profit to Rs 835.9 crore in the June quarter.

The actual growth figures are much more than the guidance because “we're very conscious that we’re in the business of risk,” Jain said.

India’s debt-GDP ratio still remains very low compared to other emerging markets, he said, adding the company is well positioned to take advantage of a growing market.

Jain doesn't foresee an interest rate shock but believes there will be compression in the net interest margins in the last two quarters of this fiscal. He also urged investors to wait for the end of the current financial year for complete details of the housing finance plans.

Watch the full conversation here:

Here are edited excerpts of the conversation:

Most people say the assets under management growth from the company will come down from 40 percent-odd levels to sub 30-35 percent and eventually settle at 25 percent. This time while the optical number might be 35 percent, the core AUMs is still at about 39-odd percent. What has happened in this quarter and what’s the outlook for next three quarters?

Our growth is reasonably secular and granular. Consumer B2B businesses which are discretionary consumption-based businesses grew 27 percent, consumer B2C businesses which is cross seller for the products to those clients grew 47 percent. Rural which is a five-year-old initiative versus the transformation journey of a company which is 11-year-old grew 75 percent. The growth rate last year was stronger than the current year but the base is much larger. In the case of SME lending, growth has made a comeback after four-five quarters of growth in mid-teens. We clearly slowed down post demonetization and GST, but we are now seeing a revival of demand in SME lending. We’re doing this business in 600 cities and as we go into smaller and smaller cities, the demand only gets larger.

We've been doing commercial lending for 9-10 years, but we were laying greater emphasis on it given the current state in overall banking system. Even investment-based clients are suffering by not getting incremental lines on time. Mortgage, which is a new initiative, which we’ve done since the last nine-ten years, had reached a size and scale where we thought it was prudent to separate the management of the business and allow them to start their own journey. It was the slowest growing segment in a way. Now, there is a new management from BFL, who are putting their arms around the business and by third or fourth quarter, they'll start to grow. The overall opportunity remains very large. If somebody is focused on building a long-term business on sustainable basis with a 5-10 year view, they should be able to seize the Indian opportunity in a profitable and sustainable manner.

Do you think that high rates are not a thing which will come off very soon?

We remain in the business of risk and not in the business of lending. If our risk ratios are modest, the opportunity is very large. I’ve always given a “guidance” we’re organised for a 25-27 percent balance sheet growth and a 22-23 percent net income growth. Versus that, even if we take the first quarter, the number is distinctly higher which is because we are very conscious of being in the business of risk. If we have to slow down because the growth is coming at the cost of risk, then we will slow down. We are building business for the long-term but on the other hand if the risk ratios continue to perform very well, this matrix along our lines of business are holding well, then we will grow too.

We are well capitalised, we have invested in building talent, technology and infrastructure, are we are very deep from a geographical representation standpoint where we are in close to 1,500 cities and towns in India. India’s consumer debt to GDP ratio remains very low by most emerging market standards, forget developed nations...then why would one not be growing? But risk is the central dimension. If it's good, you'll see us growing. Another thing which reflects on our risk ratios are gross NPA, net NPA which came down on a year-on-year basis. We published this data now to the street over the last 6-7 years. I am not talking about a year-on-year decline, they were down two years ago. Because the sophistication of the way we manage risk and the granularity is ensured, which is why we are much better placed today than we were one-twoyears ago.

Over a five-year period, the growth opportunity being what it is, at what level of asset quality numbers or the risk ratios that you would monitor, would you be comfortable growing at 35-40 percent AUM growth? Would they need to inch up substantially or are these the levels you want to maintain even if it comes at the cost of growth?

More and more existing customers do business with us out of the 28 million franchise which we have, which lowers the risk. So, today’s risk ratio or gross NPA or net NPA are going down because our weight on doing business with existing customers has been growing year-on-year over the last five years. Existing customers anywhere in the world represent half the risk versus a new customer. That comes to a cultural point. Your customers doing more and more business with you requires that he is happy doing business with you. So, customers’ ethnicity makes an important role and also ease, convenience and multi-channel play a big role. With more and more customers doing business with us, despite growing size, you will see our risk ratios fall. The wallets of consumers because we deal with mass affluent customers remain large. We have to just keep user technology, user analytical infrastructure, use the culture of the firm to do more for existing customers and keep growing. Because growth remains an important dimension while managing risk.

Does the customer acquisition clip also continue as the opportunity is so large?

We’re in 1,486 cities and towns as of June 30. The goal would be, in next three years, to be in 2,000-odd cities and towns. It does represent a very large opportunity, but it will be a phased growth at 15-18 percent distribution every year. At least, in the next three years we are clear and from thereon it would be difficult product. It does bring a lot more newer customers even in large markets. In tier-1, our penetration is very deep. As we keep going from tier-1 to tier-2 and tier-3 to tier-4, the penetration rates drop which represents a very large opportunity for granularity, management of risk and for growth of franchise.

Are we to presume that unless the rate cycle moves up dramatically, there won’t be a problem to your net interest margin because of the cost of funding?

You may see some beginning of pressure in the third and fourth quarters because it seems very clear the rate hikes are going to be real, inflation is kicking in, both on account of crude oil and GST. In general, the economy is strong which is true as it’s inflationary in nature. We are in for multiple rate hikes, transmission is lagged. So, you may see third and fourth quarters coming under some degree of pressure on accounts of difference between increase versus transmission. But it will not be significant. I don’t foresee interest rate shock, in 11 years, we haven’t seen any, so I wont worry about it.