Davos 2020: Sanjiv Bajaj Sees ‘Some Uptick’ In Consumer Lending Business 

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.

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.

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.

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.

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.

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.

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.

It is difficult to say.

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.

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.

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.

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.

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.

If that doesn’t happen, then you see some deterioration or you see stagnation.

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.

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.

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.

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, 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.

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.

It will be of a very steady growth but in the long term, it will be a very profitable business.

There is still a lot is left.

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.

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.

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.