Davos 2020: Sanjiv Bajaj Sees ‘Some Uptick’ In Consumer Lending Business
The consumer lending business has “clearly reached the bottom”, and there are early signs of “some uptick”, according to Sanjiv Bajaj.
“We’re seeing a pick-up in consumer durables business, and home electronics and digital products verticals,” the managing director of Bajaj Finserv Ltd. told BloombergQuint on the sidelines of the World Economic Forum in Davos, Switzerland. “We’ve seen about 15-17 percent year-on-year growth in the last couple of weeks. In the past years, that growth could be 30-50 percent, but there’s still some growth that we are seeing.”
It’s too early to say if the uptick is sustainable. We will wait to see how the rest of January, February and March pan out.Sanjiv Bajaj, MD, Bajaj Finserv
Retailers, online and offline, conduct festive sales by offering discounts in the first few weeks of January—which is punctuated with festivals like Makara Sankranthi/Pongal, followed by Republic Day.
‘Tailwind’ From The Government
For the non-bank financial sector as a whole to turn around, the government needs to put aside fiscal discipline for around two years and jump-start the economy, said Bajaj.
We need the tailwind from the government to rebuild the sector.Sanjiv Bajaj, MD, Bajaj Finserv
India’s non-bank lenders have been reeling since the latter half of 2018, when IL&FS Ltd. group companies defaulted on debt and triggered an industry-wide credit squeeze, raising borrowing costs for small lenders. The government and the RBI stepped in to support by assuring increased liquidity and a provision for a partial guarantee to help these firms sell loans.
Bajaj said midsize players which aren’t perceived as being “pristine” have had trouble raising funds, especially from banks. “The only answer is either economy to pick up or more equity to come in or the liquidity problem will become a solvency problem in their case.”
“If the government help doesn’t come, we’ll see some deterioration or stagnation,” said Bajaj.
Also Read: Davos 2020: Five Things To Watch For
Budget Measures, GST Refunds
Two sectors that drive the maximum growth for the NBFC sector—automobiles and housing—were facing a slowdown, and the government can revive spirits by lowering goods and services tax for carmakers or announcing incentives for buying a second home in the Union Budget next month, said Bajaj.
Small and medium enterprises, which have have been struggling over the past four to five quarters, will get a "big boost" if the government releases the GST refunds that are overdue, added Bajaj.
I’m hopeful this government does something to lift us out of where we are and that should start helping the sector.Sanjiv Bajaj, MD, Bajaj Finserv
Watch | Key takeaways from Sanjiv Bajaj’s Davos 2020 interview:
Here’s the edited transcript:
It has been a year of being exposed to the elements of the NBFC sector, hasn’t it? In the recent past, we’ve finally seen growth slow and moderate. How much of this is intended a slowdown by companies like yours and others?
We’ve done a number of financial services businesses but the lending business gives us insights about what is happening on the ground, on the consumer side as we do a large number of consumer loans—almost 2 lakh a day—also on the small and medium enterprises side and we’ve been seeing for the last four or five quarters, initially slowdown in SMEs and then over the last three quarters, slowdown on the consumer side.
Many reasons (are there) but clearly the loss of confidence in the economy has driven the slowdown. We’ve seen of course, a lot of action that the government and Reserve Bank of India have taken to provide liquidity to the sector. While all that liquidity is available, it’s of course available for better quality NBFCs and correctly so. But given that consumer confidence is still low, it has only a limited impact. Now, in the last 4-5 weeks, we’ve seen some uptick on the consumer lending side, but I think, it is still too early to say whether this is sustainable. I’d like to see how the rest of January-March period would go before we see that. I think, clearly, we’ve reached the bottom, but we’ll see if we’ve been making our way up or not.
Any specific categories where you might have seen some of this uptake in?
We’re seeing this in consumer deliverables—electronics, home electronics. We are also seeing this in digital products. These are two of the highest categories—small value but instant purchases on the consumer side and we technically look at festival periods. So, last week has been of (Makara) Sankranthi, Pongal. So, we’ve seen abut 15 to 17 percent growth year on year. Now, in the past year, the growth could be as high as 30-50 percent but there is still some growth that we are seeing over there.
Jan. 26 is going to be a very big day and we will see how that works out and that is pan-India, so we’ll see how that pans out. The larger issue clearly has been of NBFCs and their health. In many ways, I mean, the market has segregated between the better quality NBFCs and those that were not. By quality, I don’t just main quality in terms of consumer credit, I also mean business models. If you look at the last decade of 2000 to 2010, the successful NBFCs were mostly mono-lines and they were the ones getting backed by the stock market, they were the ones getting funding.
As we’ve seen, some of the large NBFCs have large exposure to the real estate sector. Now, as some of the NBFCs are in a slowdown, they were caught in a hard place and they couldn’t diversify fast enough because many of them had very chunky wholesale loans and that’s got them in a tight space. Now, as much additional liquidity that the banks have, why would they lend to some of these entities if they can see some of the significant red on their balance sheets?
So, we have to see the cycle play out. There’s no other way. We’re seeing some amount of consolidation, some cleaning up and others are just messy, they will take time. There will be NBFCs that will have gone down, some that will go down, but I see the industry coming out of it fast from there.
We decided to build Bajaj Finance as a diversified NBFC. The answer was really very simple that you didn’t want to get exposed to any one business line which businesses go through the up and down cycles and that’s the reason why we built a diversified book. I think it took five years for the industry to understand that but today, every NBFC wants to do that but the book still isn’t that.
Where are we in this cycle anyway to gauge? The reason why I asked this is, the last time when we were speaking, we were coming off the immediate impact of IL&FS in January 2019. My question is sort of a combination of your continuing concern about asset quality and where is the cycle we might be in?
As far as where the cycle has been with respect to these NBFCs and the HFCs, clearly enough is underway but the last two years—we’ve had a new bankruptcy code. For it to settle down, for the codes to settle down, takes many years. You can’t expect it work efficiently from day one. We’ve seen some very large companies go through bankruptcy court and final decisions have come out. Many others have to happen. So, we’re still in that cycle where it is taking much longer to resolve that and what was anticipated earlier on but there is no other way to go through that.
The system needs to learn and that takes time. As far as the better quality NBFC is chasing the good quality growth now, that is very much true. It is true for all of us. At the end of the day, with consumer loans, with SME loans, we’ve given loans from anything from Rs 15,000-20,000 to a few lakh, maybe Rs 30-50 lakh rupees. Now, payments come back in six months to 24 months. So, all we’re trying to do is, to judge the creditworthiness of the borrower and his or her ability to pay that in the period of time.
We know the super-rich aren’t taking loans for Rs 25,000-30,000. These are middle-class or lower middle-class customers—many of whom are in their 30s or 40s and have an EMI on the house, have an EMI on their car and then, spend some additional amount on these products. What we’ve always done is, we have seen that, of the take home pay, EMI should not form more than 60 percent of the person’s salary- so that, there is enough left to run the house and to run their lives. If it starts going up, then we end up not lending to those people till they bring down their leverage.
Now, in a time like this, people or lenders will end up being more careful. I think that is only fair when you’re building long-term, good quality businesses, you have to know when to dial down when the economy is slow, then you dial up when the better times come.
What we’ve always done is, we have seen that, of the take home pay, EMI should not form more than 60 percent of the person’s salary—so that, there is enough left to run the house and to run their lives. If it starts going up, then we end up not lending to those people till they bring down their leverage.
Is some of the growth moderation a deliberate move by some of the large NBFCs?
Very clearly. Even me if you see in our last couple of quarters when we’re still growing well and I won’t get into details or numbers but our growth is strong. But it is still lower than what it was last year or the year before that. It is conscious that we have cut out the bottom 15-20 percent of our approvals normally. We feel that those people are leveraged at a level where their salaries are not going up, they aren’t going to meet into those obligations and that’s a responsibility that as lenders, we must have. We can’t just keep lending indiscriminately.
I’m looking at CIBIL data which suggests that while there’s been a stark moderation in lending growths from 23 percent in December 2018 to 13 percent. When it comes to credit cards and personal loan growths, it’s been gangbusters. Credit cards are up 40 percent, unsecured personal loan growth 28 percent. So, square this for me.
So, let’s take this one by one. If you look at credit cards, India’s penetration of credit cards is among the lowest among the top 20-40 countries in the world. We’re talking about a total of 40 to 45 million credit cards maybe 25 million unique users out of 1.3 billion people versus to 800 million or a billion debit cards. So, that customer is very large segment there which has smartly identified those customers.
The credit card volume in India should be 10 times what it is today. So, you could still go after good quality customers who’ve not been carded and that’s the reason that you see in the growth over here. As far as personal loans are concerned, I know that we’ve cut down our approvals but here’s what I see, if you again see the last 4-5 years your whole new set of NBFCs is PE-funded or otherwise or what ex-bankers have set up their own NBFCs who look at this as a good space to build up business and won’t get a bank licence.
So, the NBFC is the next-best license to have and leveraging technology, leveraging data they are growing. I don’t see them growing as gang busters anymore but you’re not going to see 100-300 percent growth on what would have been a very small base but any growth that comes, adds to the sectoral growth which didn’t exist 3-4 years ago. So, the last answer is, is somebody is doing this recklessly, I would be surprised at this point of time you would see any kind of reckless growth.
We went through IL&FS, we spoke in January last year, you said hopefully things will stabilise, then a whole bunch of home-finance companies faced issues specially like DHFL. We’re struggling through some of the pain points now. I am wondering whether worsening asset quality is going to continue to be a problem in this sector over the next year or two.
It depends. One, on how quickly does the economy pick up again and I think, this government and I have been saying this for a few quarters needs to put aside its fiscal discipline for maybe 24 months and jumpstart the economy. If not, it’s going to be a very good discipline but a very slow climb back. So, one, when we will see the budget on the Feb. 1, if the government does provide that boost, and the economy grows, then that ends up being positive for the sector.
Second thing that we have to see is, where is additional capital is coming from and again, in today’s day and age data can tell you very clearly what kind of customer you’re lending to. So, somebody is smartly using data and lending to the better-quality customer, keep in mind, there is still 1.3 billion people. I mean, the top 100 million are still spending even in this current slowdown. We are talking of 400 million that are in the slowdown. So, the question of how each lender I would say leverages data. That is what we do at least.
Every decision of ours is driven by data and looking at data multiple ways, we run multiple projects where for a small volume of customers, we try different products, we try different interest rates with different terms in different parts of the country. We see how they are reacting and based on that, we decide where to increase exposure to reduce exposure.
How concerned should we be about the viability of several players given the cost of funds has also been peaking quite considerably for many of the mid-level and small level players?
I would separate out those exposed to real estate and especially of the wholesale side because they have very large chunky exposures and unless that sector starts improving, you will start seeing trouble over there. If you look at on the consumer side in the country, the two big sectors that can drive growth up are housing and autos. These are the two that have hurt the most.
That’s why I will see the government do something about that. If not, then those with wholesale, real estate, large exposure I think will need to recapitalise themselves. The second issue that comes there is that, you have a lot of mid-sized companies who they understand the business model but the fact that they are not of pristine quality lending. They are not getting additional debt from banks because banks now also have to be careful and I can understand that. In their case, what will happen is, their liquidity problem will become a solvency problem. So, that risk is there. The only answer is for the economy to pick up or more equity to come in the time like this to capitalise those companies into confidence, the market that they have enough money available to pay their short-term dues.
You may see my next question to the same as I’m looking for sensational headline, but I am not, I am looking for a cautionary comment. Will we see more NBFCs collapse in this year?
It is difficult to say.
You know this industry better than most and you can see which ones are in really fragile conditions.
As I said earlier, whether they will be collapse or not, depends on two things. One, the ability to raise the additional equity—the additional capital, and secondly, the cost at which the lending happens.
They are associated with the risk of fiscal losing (losses) and then how much you should do? Naturally, there are experts and economists there. I’m not an economist to say that, but we would we need that tailwind this point of time to rebuild the sector.
At what cost? The cost at which they are raising some of the capital will eventually make that business model unviable. Do you expect that 2020 will also be a year where we might see strain on NBFCs and in fact maybe some having to rethink their existence?
2007-2008 was the biggest financial crisis that we have at least experienced and the earlier generation to have experienced a crisis like that. The cost of rebuilding those companies in the U.S., in U.K. and in Europe was very high but the good ones now you are doing really well. So, I would not be a pessimist over there. It is a year that we are going through a pain and I’m clear that there is something that the government needs to do to build this economy up.
I want to talk about the SME space. You spoke of how stress first came into there, for four or five quarters ago. How much of a concern is that area for the lending industry and are we going to see further deterioration in asset quality there?
The sector has already been slow in the last 3-4 quarters. It is both the question of getting used to GST and this year and there is a significant amount of GST refund that is due to the SME sector from the government. So, the cash flow is strapped, the economy is slow and that’s why it’s a tough time for them. I hope the government releases those refunds to the SME sector and that itself will be a big boost for them going forward.
Not much of that has happened. So, further deteriorating asset quality this year?
Yes, so if you see our last quarter results, you can see that our net losses have been stopped at 10-20 basis points and that’s still very low because we run a very tight ship and because we have diversified, we can focus on other segments that are going with I would say relatively good quality.
If I have to see over the last year, we have seen not only a slowdown in that segment, but we have seen some deterioration in credit quality.
So, you are saying that by the end of this year we might end up with a slightly larger NPA problem across the industry from both the SME and personal loans point of view?
I think it is a continuing problem. I don’t expect a further surge, but I am hopeful for no reason. I have no insight but given whether this economy slows down, I’m hopeful this government does something to lift us out of where we are and that should start helping the sector.
And if that doesn’t happen?
If that doesn’t happen, then you see some deterioration or you see stagnation.
Some deterioration? Could you give me a more specific answer?
It differs from company to company. Very clearly, we have always said that we are here to build long term businesses. When we see the economy slowing down and basic credit quality in the sector is deteriorating, we will slow down growth. We will save our energy for the better day and that’s what we’ve been doing. But each company will have a different point of view.
From a sector point of view are we going to see a surge on NPA levels on account of maybe already the developer loans problem and then additional to that, the continuing issues with SME and now bit of fear around personal unsecured loans as well?
As I said earlier, I don’t think it gets much worse, but it doesn’t get better unless the government provides those tailwinds. See once that tailwind is provided even for 12-18 months, momentum will then take us forward. You can then pull back after 6 quarters but that’s required at this point in time. You have keep in mind that the government does that. Look at the entire banking sector. They have been special to public sector banks, it’s the large value loans which have caused trouble for them. If you see some private sector banks also, it is really the large value loans. They are all waiting to get into SME and many into consumer. The private sector banks have their plans very much in place to expand in on the consumer side. We just need that initial fillip to come.
I don’t think it (NPA levels) gets much worse, but it doesn’t get better unless the government provides those tailwinds. See once that tailwind is provided even for 12-18 months, momentum will then take us forward.
Do you see yourself as large Bajaj Finance expanding into broader corporate? Have you ever considered entering infrastructure, large-project finance projects?
Let me take the two questions separately. One is that, Bajaj Finance- we are broadly in five spaces. One is consumer lending- which means everything from personal loans for your television, for your mobile phone, for groceries, for your hair transplant, for cosmetic surgery.
People are buying groceries on a loan?
Yes. So, at Big Bazaar, if you are spending more than Rs 5,000, you get three EMIs on the Bajaj Finance EMI Card. So, it is about enabling the customer.
So, that is like, eat your cake and have it too, right? So, the consumer lending.
So, consumer lending and the SME lending- we talked about these two, but we do commercial lending as well. We started ten years ago with the lending to the suppliers of Bajaj Auto, we knew that we are expanding this to the auto segments, and we’ve gone by segments. We do lend to light engineering because we believe the dynamics of those segments is still good. We do to financial services and NBFCs which are much smaller than ours but of good quality but who are not able to borrow, or they borrow at very high rates. So, we have a small commercial book and we then have a rural book. By rural I mean, essentially consumer. The rural customer behaves a little differently. The aspirations are the same, but they behave differently. So, we look at that vertical independently.
Then, we have a significant fee-based focus where for example on a consumer durable product, we provide extended warranty. So, we sell them that. So, if someone is taking an SME loan, we cover it with a credit insurance products and we’ve had cases where the bread earner and the family has passed away and we’ve actually worked as the insurance company where we paid off the loan and given the rest of the money to family.
So, it’s not about making more money it’s about how you are securing the borrower as well. So, there are these five segments and then, within that we have 35 different product line segments. So, that’s why, we are very diversified. 2010 we entered the infrastructure finance space within infrastructure finance company. In about 18 months, we lent to about 15 different borrowers and syndicates. Across roads, power, multiple sectors. Our hypothesis very simple actually turned not completely wrong. The hypothesis was that, India was going for the last 10 years, infrastructure was an obvious segment that this country needed and all over the world, infrastructure lending is very low risk business. That is because of its utility. Now, when you are building roads, you are going to get cars on it, and you will be able to collect tolls. So, it is not a ROE business, it is a business where you can get chunky loans and build up a book. The long tenor loans stabilises your business as well. It is a low return. Our consumer lending was high return but volatile and this was supposed to balance it out.
What we realised that was, in India, we are still not mature as an economy. So, approvals got delayed with a debt to equity of 3-4 to 1. If your project got delayed by 2 years, the penal interest basically wiped out your equity. We realised that in the good times, as we knew this was going to be a segment with low returns, we were fine with that, but the bad times your bottom just basically falls. So, that model just didn’t make sense.
We luckily in 18 months’ time stopped, closed the business down. We were able to sell off all our loans at almost no distress. It took us two years to do that. So, I don’t see ourselves getting into that segment. I think it has very different characteristics. It requires far more maturity and I sympathise with large number of those developers. They were good quality developers. Somebody was doing a hundred-kilometre road and didn’t get land from the government for 400 metres. That’s scuttled this project after he’d done with 90 percent 98 percent of the project. So, we still need to see much more maturity coming into the segment before someone like us get into it.
What we realised that was, in India, we are still not mature as an economy. So, approvals got delayed with a debt to equity of 3-4 to 1. If your project got delayed by 2 years, the penal interest basically wiped out your equity. So, we still need to see much more maturity coming into the segment before someone like us get into it.Sanjiv Bajaj on not getting to large infrastructure projects
So, any new areas of business that that are still unexplored by you all that you might think where the next growth impetus comes in from?
In the last two years, we have created a subsidy in Bajaj Finance for housing and we are doing housing for the last 7-8 years. We learnt the business. When we became of material size, we then moved it into a subsidiary and then we had incremental business over there. So, that is going to be a significant business line going forward and the smaller ticket homes. We have recently launched a securities business, only for our customers, it is an online platform that allows them to trade and allows based on seeing their trading, to be able to lend to them. So, to do margin funding within the limits allowed to us.
Do you expect that to be a big growth turner?
It will be of a very steady growth but in the long term, it will be a very profitable business.
When we spoke in Davos last year, you mentioned two or three things that you thought should be of critical attention to the regulator and the government. You said that the regulator must treat or regulate NBFCs especially the large systemically important ones or powered banks including the ones with backstops. How much of what you thought should be done to help the sector scale, become bigger and be better or regulate what has happened and what is left?
There is still a lot is left.
Because none of the bits of banks and NBFCs on par has happened right?
I’m not talking about bringing banks or the NBFCs on par. They are two different licenses but what’s clear is that the top 30 -40 NBFCs in this country are very different from the remaining 11,000. When we get clubbed together, that doesn’t help either set. It’s also evidence based that in the last five or six years, over half the incremental credit in the economy and that’s going to consumer in SMEs comes from the NBFC sector. So, the sector has built certain capabilities. At the same time, many companies have become exceedingly large with sizes that were never thought of was possible before. This is what I believe that the Government and the RBI needs to take note of. We have created a whole new animal.
Now, you may call it a super large NBFC, you may call it a bank without a bank license, you call it what you want. It doesn’t exist in most parts of the world. To me, it is a great example where without giving a bank licence to everyone, certain companies have built experience and size in capability in the lending space, but we can see that there are still weaknesses of the liquidity side.
Now, Bajaj Finance voluntarily sets aside between 4 -8 percent of our borrowings into liquid funds to take care of tight liquidity periods. Now, nobody else does that. I don’t know any other NBFC does that and that’s why I believe RBI needs to bring in some additional discipline. You have seen that some of this happened in this year.
At the same time, if RBI were to have a liquidity window for NBFCs and you set aside some G-Secs, equivalent of an SLR for that with the RBI, as security. Against that, RBI said that, we are here to provide the last backstop on liquidity. I think it creates tremendous confidence and you will not see the liquidity problem resulting into solvency that could happen with some of these NBFCs. Other thing is that, as India has to grow, the consumer business has to grow. For the consumer business to grow, giving many more credit cards is vital for our economy. It doesn’t mean that you do over leverage the customer. We are so far away from that. But we have to just enable the customer. But we are where the RBI does not give a standalone credit card licence. When I see NBFC ourselves the last 15 years, we probably have the largest experience on the consumer lending side. I don’t think with anybody else does 1,00,000 loans a day. We did this year, almost 30 million loans.
We understand the consumer. We have a co-branded credit card that performs very well. So, one can see from experience who are the better NBFCs and give them some of these facilities. We have to digitise this country. If we have to enable this country and help it grow then those companies which are doing that, you should support them as well.
You need to own the credit card business entirely on your own is what you are saying? you don’t want to work in a co-branded situation is what you are saying?
Correct. Because we understand the consumer risk. We have the collection of capabilities. So, we are doing all the work anyway. So, we are giving some money to bank partners because the licence can’t be got. So, I think, this is License Raj in financial services. We can’t get away from that.
So, I think, this is License Raj in financial services. We can’t get away from that.
On NBFCs not given the licence to issue credit cards
How would you like to see the government go about, maybe it’s fiscal expansion if it chooses to either through tax giveaways or spending giveaways or hands and the income in the hands of farmers?
Well, when the economy slows down, it takes time to slow down. When say, it has to pick up, it will take time to pick up. We have a very low growth rate. So, one thing to do is just put or create incentives for the average consumer to buy another house, to buy another car. So, I would say cut GST on autos.
You could cut it for 12-18 months. Yes, it will cause some bleed but if the economy picks up, growth picks up. Your denominator will also go up and your deficit percentage will come back in couple of years. That is something to do. Second is, we have talked of Make In India, we want to do that, and in the world here. We have to be consistent across what we do when we want to attract the world over here. Why attract the world over here? How many are attracting Indian business over here? I would say that while the move on corporate tax was a good move, but just keep one low rate for everybody.
For example, when the low rates were announced, we cut some of our prices to customers, we increased salary for a lower bottom 50 percent of our employees and we will see what the board does for a year. So, we distributed some of that and if everybody starts doing that, that’s how we are building the economy. So, take a look at corporate tax rates as well. Even though the government increases personal income tax rates on the super-rich. I am a poor guy but the super-rich don’t like it and nobody likes to talk about it. But, if we want to built this economy, incentivise everybody, motivate everybody and get everybody excited towards it, then you will see how India will grow.
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Watch the full interview with Sanjiv Bajaj on NBFCs, economic growth, budget expectations and more from Davos 2020.