The Reserve Bank of India (RBI) recently took action against Bajaj Finance, India’s top consumer financier.
They stopped Bajaj Finance from approving and giving out loans for ‘eCOM’ and ‘Insta EMI Card.’ This decision came because the necessary information, known as the key fact statements (KFS), was not given to borrowers for these loans.
Additionally, there were problems with the KFS for other digital loans provided by the company.
What is KFS?
Key Fact Statements (KFS) are crucial documents outlining essential loan details such as the amount, duration, interest rate, and associated fees or penalties.
According to RBI regulations, digital loan customers must receive these details in a clear and concise format. Unfortunately, Bajaj Finance failed to provide these essential documents to its customers, violating the RBI’s digital lending guidelines.
Analysing Company Performance and Financial Impact
According to a report from Macquarie, analyst estimates for the company are varied. In the second quarter, the company added 3,580,000 customers, with approximately 19% (or 670,000) being EMI card customers, as per the investor presentation.
The digitally-sourced EMI card franchise accounted for 10% of the total EMI card base, totalling 4,200,000 customers.
Financial service provider Jefferies anticipates a restricted financial impact on the company. Their estimate suggests that the Insta EMI Card base stands at 4,000,000 customers, constituting 5% of the total client base. According to Jefferies’ analysis, this is equivalent to 0.2% of disbursals, less than 1% of fees, and less than 0.5% of profit.
Macquarie has expressed its intention to closely observe the repercussions of the RBI’s action on disbursement and AUM (Assets Under Management) growth.
There is a potential for a decline in AUM growth, affecting profitability through weaker growth in AUM and fee income.
On the other hand, Jefferies views this situation differently, not considering it a significant concern. In a worst-case scenario, Jefferies anticipates a 27% loan growth, Net Interest Margins (NIMs) of 9.8%, and credit costs (provisions for bad loans) at 1.7% of loans.
Bajaj Finance growth and emerging competition in digital lending
In August of the previous year, the Reserve Bank issued guidelines to safeguard the interests of borrowers in the digital lending space.
These regulations primarily target the digital lending ecosystem involving RBI Regulated Entities (REs) and the lending service providers (LSPs) they enlist to offer permissible credit facilitation services.
In January 2021, the central bank established a working group specifically focused on ‘digital lending, including lending through online platforms and mobile apps’ (WGDL).
Bajaj Finance, headquartered in Pune, has recently disclosed a 28% increase in its consolidated net profit. By that, the company is now reaching ₹3,551 crore for the second quarter.
The RBI’s action coincides with Reliance Industries-backed Jio Financial gearing up for its foray into financial services. Jio, equipped with an extensive telecom network and substantial resources, poses a potential challenge to Bajaj, traditionally India’s leading consumer finance company.
If Bajaj faces an extended ban on onboarding new digital lending customers, it might create an opportunity for Jio, impacting Bajaj’s growth prospects in the competitive landscape.
Bajaj Finance’s response to RBI’s concerns
Bajaj Finance has stated that it anticipates the RBI’s action to have no significant financial impact on the company.
The company has committed to addressing the RBI’s concerns regarding Key Fact Statements (KFS). Bajaj Finance plans to rectify the observed issues in KFS and promptly adhere to the RBI’s directions.
They are currently reviewing the KFS for loans under the two lending products, considering the RBI’s concerns, and will implement necessary corrective actions.
The company further emphasised,
“The actions taken, along with those communicated on November 15, 2023, will not significantly affect the Company financially.”
They are actively working to address the identified deficiencies promptly and are committed to engaging with the RBI to ensure compliance across all parameters.
