In the first quarter of this financial year (April-June), Bajaj Finance saw a significant jump in its loan loss provisions due to weak collections and the need for higher reserves for older unpaid loans.
The Pune-based non-bank lender said this situation has pushed it to focus more on improving collection efficiency, which measures how much of a loan’s repayment amount is collected.
The total loan losses and provisions for the quarter reached ₹1,790 crore. The company used a management overlay of ₹105 crore, resulting in net loan losses and provisions of ₹1,685 crore. Management overlay is a reserve created during emergencies, such as the pandemic.
During a call with analysts on Tuesday, Bajaj Finance’s management mentioned that while the overall portfolio quality was steady and bounce rates (missed payments) were lower compared to the previous quarter, many loans moved from stage 1 to stage 2 due to weak collections, causing an increase in loan losses. Stage 2 loans require higher provisions than stage 1 loans and increased by ₹865 crore compared to the previous quarter.
The company is now boosting its debt management system to deal with these issues. They are also carefully monitoring stress in different business areas and reducing exposure to certain customer segments.
Emkay Global Financial noted that Bajaj Finance’s credit cost rose to 1.97%, up by 33 basis points from the previous quarter, partly due to election-related disruptions in collections. They expect the credit cost to normalize to around 1.75-1.85% over the next two quarters.
The management explained that similar loan loss increases happened during the 2019 elections and may take one to three quarters to stabilize. They expect loan losses to stay high this quarter but start normalizing by the third quarter (October-December).
Bajaj Finance’s gross non-performing asset (NPA) ratio improved slightly to 0.86% from 0.87% a year ago. However, the net NPA ratio worsened to 0.38% from 0.31% a year ago due to higher provisions. The previous quarter’s gross NPA ratio was 0.85%, and the net NPA ratio was 0.37%.
The stress is mainly seen in loans for two- and three-wheelers, rural consumer lending (B2C), and SME loans, while growth in the rural business-to-business segment remains strong. The urban B2C segment’s asset quality is steady, but the management is vigilant for any stress signs.
The rural B2C portfolio has grown slowly, at 5-6% over the past year, including 5% in Q1FY25. However, they expect growth to pick up to 10-11% for FY25. The company has been adjusting the borrower profile and aims to diversify it as it was before COVID-19.
Rural B2C loans, mainly cross-sold personal loans, have been affected by the RBI’s increased risk weights for this segment, leading to stagnation in disbursements from November 2023 to June 2024. This is expected to slow growth in unsecured loans industry-wide.
The share of unique customers (those without existing credit exposure) for Bajaj Finance fell to 58% in June 2024 from 63% in March 2020. This means 42% of current customers already have loans, an increase of 3% from last year. However, the overall borrower profile remains healthy, with a smaller share of customers having outstanding personal loans compared to the previous year.
After the RBI lifted restrictions on loans under the ‘eCOM’ and ‘Insta EMI Card’ verticals on May 2, Bajaj Finance resumed the EMI card business on May 10 and the eCOM business in early June, causing a slowdown in disbursements during Q1. The company expects these areas to pick up over the next three quarters, projecting overall loan growth for FY25 at 26-28%.
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