Why Sanjiv Bajaj wants to start a bank

Last Updated: Thu, Dec 12, 2013 06:01 hrs

One of the 25 applicants for a new banking licence is Bajaj Finance, the non-banking finance arm of Bajaj Finserv. Reserve Bank of India Governor Raghuram Rajan wants to hand out these licences by January 24. If he gets a licence, Managing Director Sanjiv Bajaj plans to bank on innovation to grow his bank. He doesn't say what form it will take but his intent is clear. "I think over the next 20 years, you are going to see tremendous innovation in banking," says he. "We need that innovation."

Bajaj's track record on innovation is not too bad. When others pulled out of financing of consumer durables in 2009 after logging huge losses, he took a contrarian call to grow the business and invest more in back-end systems to process small-ticket loans faster. He was sure that the business would eventually prove quite profitable if the company could devise the right strategies to bring in the volumes. The move has paid off. From a share of just about 1 per cent in the sale of consumer durables in the country four years ago, Bajaj Finance (it started out as the two-wheeler financing arm of Bajaj Auto) now finances 15 per cent of the consumer durables sold in the country.

Innovation has played a huge role in this success. The company was the first financer to launch a swipe card which came with pre-approved limits for existing customers. Use of the card allowed customers to walk out of showrooms with their purchases in minutes. It also offered zero per-cent financing resulting from tie-ups with various manufacturers. With a big staff to man the service kiosks in shopping malls across India and small loans - the average size is around Rs 27,000 -, Bajaj Finance's sheer volumes provide decent margins to the company. This business accounts for around 13 per cent of the company's loan book, and 20 per cent of its gross margins.

As a non-banking finance company, Bajaj Finance has access to only loan and equity in order to grow. As a bank, it can take deposits from the public, especially low-cost current-account and savings-account deposits. But attracting public deposits is not easy. Sanjiv Bajaj is aware of the challenges. "You can't buy customer loyalty by offering higher interest; it will come through transparency which (in turn) will come through our millions of customers," says he.

Bajaj is hopeful that he will be able to start the bank within 18 months of getting RBI's permission. "We do have a significant business that can be transferred into a bank," says he. Here again, the market presence of Bajaj Finance could come handy. "We have the right set of customers with us," says he. "We know that cross-selling is the right thing to do if you want to increase your return on equity." Bajaj also says that as a bank, he will have to provide for NPAs conservatively. "We are (already) making provisions like a bank. While it's still a big challenge, if we are to convert into a bank it will be relatively easier for us," he says.

There are other challenges too that need to be addressed. Currently, all personal loans to buyers of Bajaj Auto customers are provided by Bajaj Finance. Once the bank licence comes, this exclusivity will have to go. At a time when rivals like Hero MotoCorp and TVS are strengthening their finance arms, this could erode Bajaj Auto's competitive edge. Also, the automobile finance division of Bajaj Finance is managed by Rajiv Bajaj. After the bank licence, that will amount to conflict of interest. "We need clarity on the rules for new banks and we are looking to find a solution to these problems," Rajiv Bajaj recently told Business Standard.

Somewhere along the line, the younger son of Rahul Bajaj (Rajiv, the older son, runs Bajaj Auto, India's most profitable maker of two-wheelers), began looking beyond the bread-and-butter business of financing consumer durables and two-wheelers. It thus expanded to other businesses such as lending to small-scale enterprises, funding construction equipment, and loans against property. Over the years, it has increased its loan book to over Rs 20,000 crore. Now it wants to spread further. Bajaj Finance, which had kept out of rural financing, is venturing out of the cities to disbursing loans for auto re-financing and for farm equipment in rural areas.

However, Bajaj Finance is keeping a watch on its construction-equipment financing business, which accounts for around 3 per cent of its loans. Two years ago, this business accounted for around 8 per cent of all loans. But with the sector going into a tailspin as the economy slowed, the risks for lenders have risen. So, the company now restricts itself to financing only those with a strong financial background and with whom it has a long-term business relationship. Says Bajaj: "We are approving fewer loans here because of the slowing construction environment. But we have not stopped them altogether." It is due to these stringent lending practices and careful selection of customers that Bajaj Finance's net non-performing assets are almost negligible. In the last quarter, NPAs stood at 0.26 per cent of all assets; some other similar companies run NPAs closer to 1.2 per cent.

Other businesses
While the financing business has been on a strong wicket, Bajaj Finserv's life insurance subsidiary, Bajaj Allianz Life Insurance Company, has gone through a rough patch. The insurance sector has seen a host of regulatory changes in the past few years, some due to mis-selling, over investment and lower returns. Losses in the industry mounted significantly in 2008 and 2009 as players tried to gain a higher share in the new premium market. That's when Bajaj decided to scale back investments. He attributes this pullback to the fact that if one has to build a business which is value-oriented one should not succumb to temptations of short-term growth. Thus, new business premium plummeted from Rs 4,500 crore in 2008-09 to Rs 2,717 crore in 2011-12. But Bajaj has been able to turn around the business lately by focusing on value-added services in insurance claims and new business processing. In 2012-13, when the industry saw a drop in new business premiums of 6.3 per cent, Bajaj Allianz Life Insurance clocked growth of 10 per cent (to Rs 2,988 crore).

Bajaj Finserv's general insurance subsidiary, however, has been doing well from the beginning. Bajaj Allianz General Insurance is clocking higher growth than the industry due to strong tie-ups with re-insurers and good customer segment. While the general insurance industry has seen growth of 19 per cent, Bajaj Allianz General Insurance grew 22 per cent (to Rs 4,063 crore in gross written premiums).

Strong performance
As all three of its subsidiaries are logging decent profits, Bajaj Finserv showed good growth in consolidated numbers in 2012-13. Revenues and profits surged 9 and 18 per cent, respectively. But analysts say that though Bajaj Finserv has made progress in the recent past -its price/earnings stands at over 180 on standalone basis- they are more optimistic about the prospects of Bajaj Finance, the listed subsidiary. "Bajaj Finance is a very well-managed consumer-financing company and is very well capitalised, growing at a very healthy clip. It is well-positioned to defy the slowdown in the financing business," says an analyst. The stock is currently trading at around Rs 1,480 on BSE, and its P/E is 11.06.

Nevertheless, Bajaj's challenge now lies in the next leg of growth, and expanding his business if he does not get a banking licence. He concedes that finding the right people to grow the businesses is a worry. "We have built a certain culture in our organisation, and finding the right kind of people to fit into our culture is our single biggest challenge." Bajaj is still aiming to grow the lending business by 20 per cent by looking at prudent lending practices and keeping costs low. Analysts say that such growth is possible in the coming years even without a banking licence, but it might do much better with one.

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