Slide 2

RBI recognizes a company as an NBFC, when - a company’s financial assets constitute more than 50
percent of the total assets and income from financial assets constitute more than 50 percent of the
gross income. This is known as the 50-50 test.

Diagram 1 – classification based on terms of liability

Diagram 2 - classification based on size and systematic importance

Bajaj Finance was incorporated in 2007, as an auto finance company. Over the years it has successfully
diversified into multiple sectors and geographies. Bajaj Finance is arguably the best placed NBFC in India,
with a stellar 35% AUM growth and a fairly stable NII of around 10%. Bajaj Finance does its major
business in the consumer segment, unlike the other players who have always seen small ticket size loans
as a loss-making proposition. We will expand on this further in our presentation.

Slide 3

Business strategy of Bajaj Finance?

Being the most well-capitalized NBFC, Bajaj Finance checks all boxes when it is placed as a borrower.
Hence, one of the important factors in the success of Bajaj Fin has been the lower cost of borrowings
which have pushed the NII higher.

Since the company also enjoys the luxury of Deposits, another source of stable and low-medium cost of
borrowings is always present with them.

Through their zero EMI loan structure and strategic tie-ups, they are able to capture a huge chunk of the consumer
loans at a relatively lower cost, since the zero EMI gimmick has worked for them. The effort that the company
makes is to cross-sell these acquired customers, one of their many products like insurance, Auto loans, consumer
durable loans etc.

In the corporate and SME loans segment, the key to success is the ability to offer lower interest rates and brand
name. Bajaj Finance again satisfies both the conditions here, In the recent years it has upped its game as far as
SME’s and corporate lending is concerned.

The cross-selling ability has been built on its ever increasing product portfolio. Bajaj has been adding new products
each year to enhance the reach it has to the customers.

Another major success factor in cross-selling has been its heavy investment in Data Analytics capabilities, allowing
it to identify the right product to be marketed to the customer.

As far as the main drivers of the business are concerned, there are 4 main pillars which support the
growing bottom line –

1. Zero-Cost EMI Card - The company has successfully marketed its consumer loans through this
zero cost(interest) EMI product. It has acquired a lot of small ticket size loans through this
strategy. However, these loans are not zero interest as there is a processing fee involved
 2. Cross-selling - The customers that are acquired from the Zero-EMI card, are then cross-sold the
other products Bajaj Finance has to offer. As of Q3FY20, 76% of its total franchise was cross-sold
to
3. Tie-ups with Retailers and Brands as well as Manufacturers - Bajaj Finance directly ties-up with
retailers and brands and financing for their products is offered by Bajaj at their stores itself.
These partnerships brought volumes to brands and Bajaj gets to charge a % fee on those
transactions
4. Processing fees & Late fees - Bajaj Finance charges processing fees on its loans, even on the
zero EMI loans. In case of late fees, the interest rates can go high up to 30-40%.

Slide 4:

COVID has not left Bajaj finance unscathed as NPA’s have risen over the last 2 quarters. In the recent
quarters though bounce rate, people taking moratorium and GNPA have reduced below management
expectations.

Cash flow from operations has reduced, and they are currently focusing on current existing customers
rather than acquire new ones. In the recent quarterly report, it was stated that they have stopped hiring
in all segments except among collection agents.

80-70% of there moratorium has been taken up by the automobile segment and as a result, they have
been more careful in their lending activities in this space.

Slide 5:

The reason for the fall of major NBFC is their excessive exposure to a particular segment as in the case of
IL&FS which was exposed more for Infrastructure lending. Bajaj Finance is fairly secured in this regard as
it has already diversified its business and is continuously adding new customer segments and products
to its portfolios.

Apart from this there are 3 major reasons which pose a threat to NBFC and they are:

I. The high cost of funds and absence of support from any parent company leading into credit
squeeze.
II. Asset-Liability Mismatch i.e. borrowing for short term and lending for the long term.
III. Poor asset quality.

The cost of funds of the Bajaj is decreasing over the years and is also one of the minimum among its
peers. The reason can be attributed to an increased portion of deposits in the borrowing mix which is
relatively cheap among other options of raising money. This helps them in offering products as
competitive rates and thus builds a customer base and also conserves cash. The cash can be used in
feeding back to its business strategy which is to innovate and launch new products and also absorb
shocks due to sudden deterioration in macroeconomics as done this year when they build a war chest by
gathering 1300 crore in cash.
Slide 6:

The Asset-Liability mismatch blew up many financial institutions in the past but Bajaj Finance is free
from this problem. This is because they generally lend for short term (1-3 years) and borrow for the long
term (>3 years). Even in some cases i.e. consumer durable loans the loan duration is as short as 6
months. The Asset-Liability match table as depicted below shows that over the coming years Bajaj is free
from the ALM issue and has surplus liquidity.

Asset Quality:

The asset quality of Bajaj Finance is at par when compared to its peers. There is a significant rise in GNPA
60 bps from the previous year majorly due to COVID related disruptions but the quality is expected to
reach its previous level and further improved from there as the book under moratorium is improved
from 25% to 15% of AUM.

The reason for better asset quality is also attributed to the business model in which almost 70% of the
loans are given to existing customers whose record is already known and thus have fewer chances to
default as compared to new customers.

So in the short to medium term, we expect Bajaj Finance to sustain its growth rate.

Now for the long term, historically AUM has shown a tremendous growth rate of 27% in the past 5
years. It slowed a bit due to COVID related disruptions but the expectation is that it will bounce back to
reach the level of 22%-27% in the medium term. But over the long term as the company reaches its
mature phase than there will be less opportunity for new product innovation and also owing to large
customer base the ability to customer addition will also flatten. It will also attract competitors as other
NBFC will also venture for new segments and thus the need to compete on price can come into effect
and the ability to increase profit substantially will take a hit.

The impact of price war and saturation in decreasing the cost of funds will ultimately impact the NIM. So
in the long term although the profitability can be maintained by working on operating cost reduction the
growth will taper down gradually.

Business strategy of Bajaj Finance?

Being the most well-capitalized NBFC, Bajaj Finance checks all boxes when it is placed as a borrower.
Hence, one of the important factors in the success of Bajaj Fin has been the lower cost of borrowings
which have pushed the NII higher.
Since the company also enjoys the luxury of Deposits, another source of stable and low-medium cost of
borrowings is always present with them.

As far as the main drivers of the business are concerned, there are 4 main pillars which support the
growing bottom line –

5. Zero-Cost EMI Card - The company has successfully marketed its consumer loans through this
zero cost(interest) EMI product. It has acquired a lot of small ticket size loans through this
strategy. However, these loans are not zero interest as there is a processing fee involved
6. Cross-selling - The customers that are acquired from the Zero-EMI card, are then cross-sold the
other products Bajaj Finance has to offer. As of Q3FY20, 76% of its total franchise was cross-sold
to
7. Tie-ups with Retailers and Brands as well as Manufacturers - Bajaj Finance directly ties-up with
retailers and brands and financing for their products is offered by Bajaj at their stores itself.
These partnerships brought volumes to brands and Bajaj gets to charge a % fee on those
transactions
8. Processing fees & Late fees - Bajaj Finance charges processing fees on its loans, even on the
zero EMI loans. In case of late fees, the interest rates can go high up to 30-40%.

Bajaj Finance has been able to achieve the cross-selling ability as it is heavily investing in Data Analytics capabilities,
allowing it to identify the right product to be marketed to the customer.

Slide 7

So what are the differences between a bank and an NBFC?

So in contrast to a bank,

- NBFC cannot accept demand deposits,

- It cannot issue cheques drawn on itself
- It is not able to offer depositor’s Insurance as offered by DICGC to banks
- It can provide a few of the banking services without actually holding a banking license
- FDI is allowed up to 100%
- It cannot indulge in agricultural, industrial activity, sale-purchase and construction of immovable
property

So what if Bajaj Finance converts into a Bank? What would be its Pros and Cons?

Coming to Cons firsts,

- Banking Regulation Act, 1949, and RBI compliance policies will become applicable.
- It will have to comply with priority sector lending targets and sub-targets diluting the returns.
- The whole process of conversion will be time-consuming and an expensive one.
 - It will have to adhere to stricter regulatory requirements such as maintaining Cash Reserve
Ratio, Statutory Liquidity Ratio which will reduce the capital available for disbursing.
- It will have to open 25% of its all-new branches in unbanked rural areas.
- It will not be able to trade in money markets.
- It will not be able to disburse loans easily to SMEs and to individuals with lower credit scores
since as a bank it would have to put a lot of focus on credit scores.
- It will not be able to take advantage of the quick processing of loans since banks have long
paperwork with strict eligibility and requirements.
- Promoters will have to reduce their stake from 56% to 15% as mandated by RBI
- And because of all these reasons, it faces the risk of its growth rate getting hampered.

Coming to Pros now,

- It will be able to accept demand deposits which means that it will have access to low-cost
funding at 0% rate for current account funds and at a 3-6% rate for savings accounts funds
which is much lower than what it pays now.
- It will be able to ensure credit guarantee to its depositors’ through DICGC
- Given its reach in rural India, Bajaj Finance could leverage it to gain market share with the
innovative solutions it has been providing until now.
- Relatively lesser cost of borrowing
- It will be a part of the payment and settlement system.
- It will be able to issue cheques drawn on itself.

So in conclusion to our findings, Banks have not shown very strong credit growth in the short term
whereas Bajaj Finance has grown twice even in an economic slowdown and has outperformed in recent
years

Bajaj Finance is already a leader in its sector, having a significant market share, while when it ventures
into banking, it will have to fight with leaders like HDFC Bank and ICICI Bank.