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‘Small-ticket’ model helps Bajaj Finance make it big

Bajaj Finance is known in the nonbank lending industry for its customer-profiling algorithms.

, ET Bureau|
Updated: Nov 26, 2019, 08.56 AM IST
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Despite the evident success of its revenue model, Bajaj Finance continues to be conservative.
Mumbai: In the world of big money, Bajaj Finance has stuck to small loans, towering above numerous financing giants now buried under the rubble of debt. Global investors appear to have cast their vote in favour of the company’s ‘small-ticket’ business model: The Pune-based financier effortlessly raised $1.2 billion in a market where nonbanking finance company (NBFC) bond yields have surged past 75 per cent in the past four quarters. Bond yields and prices move in inverse directions.

The financier, which has helped millions of Indians step on to the consumption ladder in the past decade, had the luxury of choice in an industry that was rocked by the Infrastructure Leasing and Financial Services (IL&FS) default last autumn, and drew bids worth $5 billion for less than a quarter of the amount of bonds on offer.

“At first, people didn’t believe that we can get so much money by giving small-ticket loans,” said Rajeev Jain, managing director and CEO, Bajaj Finance, Company of the Year in this year’s Economic Times Awards for Corporate Excellence. “Those who believed in the glint in our eyes bought it (the debt).”

Bajaj Finance has created a unique financing model and the journey continues with new products, geographies and delivery mechanisms for the lender to those seeking to buy television sets, cooking appliances, refrigerators and air-conditioners.

“We have continued to be in a discovery mode,” said Jain. “We continue to discover India, discover our strategy. We never thought we would become a Rs 1.5 lakh crore book, from Rs 2,500 crore. I don’t think we thought with it would come Rs 8,000 crore of profit, 40 million customers, or presence in 2,000 cities in India. We kept discovering strategies and with that discovering India. That has been the story of the company.”

Bajaj Finance is known in the nonbank lending industry for its customer-profiling algorithms and short loan durations. Among the hundreds of parameters used, for instance, is the store visit time of the potential borrower — a data point that allows the company to assess creditworthiness. Similarly, its loans close in less than three years and some are as short as six months, leaving little room for asset-liability mismatches.

Asset-liability mismatches in the immediate aftermath of the IL&FS crisis crippled the lending ability of most NBFCs, with companies focusing instead on resetting their liability profiles to mitigate the impact of surging fund costs. Bajaj Finance, by contrast, expanded its loan book by 38 per cent in this period.

“In our business, giving money is easy but because we are not a bank, managing liabilities is an issue,” said Jain. “Interconnectedness emerged as a huge threat to the system.”

The stellar run over the past year, considered among the most difficult for India's consumption and related financing industries, has strengthened Bajaj Finance's resolve to dominate the service lines in which it’s present. It aspires to be a dominant nonbank, mortgage and securities lender.

The retail brokerage business went live in October.
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“We will create granularity in the business, whether by product or by geographies,” Jain said.

The company is looking to invest gains from tax cuts in expanding to 450 new cities.

“The government wanted us to invest and that is why the corporate tax rate was cut,” said Jain. “We will add 2,000 people in the next six-nine months. We are investing deep to ensure that benefits that emerge from tax cuts are put to good use.”

Despite the evident success of its revenue model, Bajaj Finance continues to be conservative.

“People would ask me when am I going to deliver 20 per cent RoE (return on equity) on the mortgage company and I could not pull it off even on an Excel sheet,” said Jain. “We are telling investors that we will have a large business but a 14-15 per cent RoE is a fair expectation, is low-risk and (ensures) sustainable returns.”

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