Reserve Bank of India (RBI) has barred Bajaj Finance, India’s largest consumer financier, from sanctioning and disbursing loans under two of its lending products – ‘eCOM’ and ‘Insta EMI Card’ citing non-issuance of key fact statements (KFS) to the borrowers under these two lending products and deficiencies in the KFS for other digital loans of the company.
What is a KFS?
A KFS is a document detailing vital information on a loan like amount, tenure, interest rate, fees and penalties. RBI rules mandate that digital loan customers are given these details in an easy to read concise format. These are part of the RBI’s digital lending guidelines and were not provided for the customers of Bajaj Finance.
What could be the impact of this ban on Bajaj Finance?
Analyst estimates are mixed. A Macquarie report citing the company’s investor presentation said out of the 35.8 lakh customers added in the second quarter about 6.7 lakh or 19% were EMI card customers. Digitally-sourced EMI card franchise stood at 42 lakh or 10% of the EMI card base.
However, Jefferies expects a limited financial impact on the company as it estimates the insta EMI Card base at 40 lakhs or 5% of total clients, that is 0.2% of disbursals, which is less than 1% of fees and less than 0.5% of profit.
What has the company said?
Bajaj Finance said it does not expect the RBI action to have a material financial impact on the company. The company will rectify observations of the RBI in KFS and comply with RBI directions at the soonest. It is reviewing the KFS for the loans booked under the two lending products, based on the concerns raised by the RBI and implementing requisite corrective actions.
What does it mean in the digital age? Could rivals get an advantage?
The RBI action comes at a time when Reliance Industries-promoted Jio Financial has padded up to start its financial services journey. Jio, with its vast telecom network, deep pockets, and a clean slate could pose a challenge to Bajaj, which has so far been India’s undisputed consumer finance company. A prolonged ban on Bajaj onboarding new digital lending customers could leave the field open for Jio and hurt Bajaj’s growth prospects.
How much business could this impact?
Macquarie said it will monitor the impact of RBI’s move on disbursement and AUM growth. There could be a possible decline in AUM growth and related impact on profitability due to weaker growth in AUM and fee income. But Jefferies does not see it a serious issue. Even in the worst case, Jefferies expects a 27% loan growth, NIMs, which is the difference between the yield earned on loans and cost of funds, of 9.8%. It expects credit cost which is provisions for bad loans at 1.7% of loans.
How could it impact the company’s stock price? Can premium valuations be sustained, or like HDFC Bank, suffer investor neglect for a while?
The company’s stock has actually inched up 0.68% to Rs 7273 per share on Thursday. Even in a worst case scenario, Jefferies expects not more than 1% fall with a price target of Rs 7,290 with standalone entity valued at 5.8 times to book. But it all depends on how soon the company could rectify its errors and overturn the ban.