Grey Area: Debating Bajaj Finance’s ‘Flexi Loan’ Switch

Bajaj Finance Ltd., which reported quarterly earnings on Tuesday, threw in a twist. The non-bank lender took a substantial amount of term loans and converted them into a product called ‘flexi loans’. Among other features, these flexi-loans allow customers to defer repayments on the the principal amount for one to two years. Bajaj Finance charged a fee for the conversion.

The product has existed for some time. It’s offered at a higher interest rate and the lender makes a good margin on it. The timing of the switch, however, raised some eyebrows.

Bajaj Finance said it had converted Rs 8,600 crore in term loans to flexi loans at fee. About Rs 5,000 crore of these were loans to borrowers who did not seek to delay loan repayments under the moratorium, and about Rs 3,600 crore were to those who did seek moratorium treatment.

Should this be seen as a restructuring of loans? At its very core, restructuring is an exercise that allows for any change in repayment terms of an existing loan that may be stressed. Restructured loans are to be classified as non-performing, with some exceptions provided by the Reserve Bank of India, such as for loans to medium-sized businesses.

Should Bajaj Finance’s switch of term loans to flexi loans be seen as an attempt to manage stressed loans? Brokerages are divided.

Also Read: Bajaj Finance Q1 Profit Falls On Additional Contingency Provisions

Kotak Institutional Equities

The Street has raised concerns on the flexi loans offered by Bajaj (25% of AUMs), Kotak Institutional Equities said in its note. These loans are offered by the company for the past five years to non-delinquent borrowers with good track records.

“We believe these loans are in the normal course of business, comparable to other EMI or interest only/working capital demand loans,” it said. “Increase in this facility by Rs 8,600 crore in Q1 is no doubt high but even if we add flexi borrowers under moratorium of Rs 3,600 crore, the moratorium ratio increases to 18%.”

Morgan Stanley

Profitability in this product is distinctively higher (owing to higher yields and fees) and with low loan losses, Morgan Stanley said in its note. The brokerage said that while such conversions aren’t ideal, they may be pragmatic.

“Economic conditions are tough and uncertain, and while it may not be ideal to accommodate borrowers with a good track record in such exceptional conditions, it may be pragmatic. To that extent, the flexi-loan gets borrowers to pay at least interest, which is a sizeable portion of a usual installment.”

Bernstein

Flexi loans are normal, but the timing is suspect, said Bernstein.

“The flexi loan product was an approach that the company used to extend the duration of their book and ensure stickiness - normal part of the business. The timing of the conversion of term loans to flexi loans though is suspect,” the brokerage said. “As a flexi repayment schedule does put less pressure on the collection infrastructure, if the loan book quality deteriorates later and management has more time to react.”

Motilal Oswal

Bajaj Finance started offering flexi loans in 2013 in the LAP (loans against property) product and expanded this to several other products, said Motilal Oswal.

The brokerage house said that if the share of converted loans, which were under moratorium, are added back, the moratorium rate for Bajaj Finance would have been 18.3%.