Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating for Rs 17000 crore Non-convertible debentures while reaffirming its ratings on the bank facilities and other debt instruments of Bajaj Finance Limited (BFL) at 'CRISIL AAA/FAAA/Stable/CRISIL A1+'.

 

Ratings continue to reflect Bajaj Finance's strong business risk profile, given its position as one of the largest retail asset financing non-banking financial companies (NBFCs) in the country, and expectation of comfortable capitalisation metrics. Increased focus on risk management and data analytics should mitigate the inherent asset quality challenges in the risky asset segments. Healthy earnings also underpin the ratings. The ratings also reflect expectation of support from the Bajaj group and its healthy financial flexibility.

 

Consequent to redemption, CRISIL Ratings has also withdrawn its rating on debentures of Rs 1649.5 crore (See Annexure 'Details of rating withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.

Analytical Approach

The ratings factor in the company’s strategic importance to, its ultimate holding company Bajaj Holdings and Investments Ltd (BHIL), and parent Bajaj Finserv Ltd (Bajaj Finserv). The ratings also factor in support if required from the parent company in an unlikely event of Bajaj Finance requiring support in extraordinary situation.  The ratings also factor benefits arising from synergies with the group.

 

CRISIL Ratings has also analysed the consolidated business and financial risk profile of BFL and its subsidiaries (Bajaj Housing Finance Limited and Bajaj Financial Securities Limited) together referred to as group.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

* Large, well-diversified NBFC

Bajaj Finance has emerged as one of the largest retail asset financing NBFCs in India and continues with its two-pronged strategy of building scale and to maximise profit. Segments such as mortgages, small business loans, and commercial lending are focused on building scale, while consumer durable loans, personal loans, and 2- and 3-wheeler financing are focused to maximise profit.

 

As on December 31, 2021, assets under management (AUM) registered a growth of 7.8% (quarter-on-quarter; Q-o-Q) to Rs 132,913 crores on a standalone basis, primarily contributed by a growth in consumer finance and rural lending portfolios. The AUM consisted primarily of personal and consumer durables loans (38%), mortgages (loans against property [LAP] and home loans including LRD (9%), SME loans and vendor financing (22%), two- and three-wheeler financing (8%), rural financing (14%), loan against securities (6%) and others (3%).

 

At a consolidated level, the AUM registered a growth of 8.6% Q-o-Q to Rs 181,250 crores, with Bajaj Housing Finance Limited (BHFL) constituting 27% of the AUM. BHFL is the vehicle for BFL for growing the mortgages business and has attained significant size and scale in the past two years as a share of the overall AUM for the Bajaj group. At a consolidated level, the AUM consists of personal and consumer durables loans (29%), mortgages (loans against property [LAP] and home loans; 32%), SME loans and vendor financing (16%), two- and three-wheeler financing (6%), rural financing (11%), loan against securities (5%) and others (1%).

 

While the group has been reporting strong growth in the AUM over the past five years, growing at a CAGR of 27%, the current weak macro-economic environment is expected to impact the growth in the near term. Nevertheless, over the medium term, the group is expected to continue to outpace the industry.

 

* Strong capitalisation

Capitalisation is robust, with sizeable standalone networth of Rs 39,688 crore and adequate Tier-I capital ratio and capital adequacy ratio (CAR) of 24.4% and 27.0%, respectively, as on December 31, 2021.Adjusted gearing was comfortable at 2.9 times as on December 31, 2021 on standalone basis and 3.7 times on consolidated basis. The gearing policy is conservative. Adjusted gearing has been below 6 times over the past five years, despite aggressive growth in AUM.

 

Bajaj group has demonstrated the ability to raise capital at regular intervals to keep the gearing metrics under control. Over the past five fiscals, the group has raised Rs 14,908 crores of equity which has significantly increased the networth of the company with the recent capital raise being of around Rs 8,500 crores in November 2019. Each time the gearing metrics have inched closer to 7x, capital raising plans have been initiated and concluded. 

 

The healthy capitalisation enhances the ability to absorb potential losses on its portfolio; adjusted networth to net NPAs was healthy, at 30 times as on December 31, 2021 (35 times as on March 31, 2021).

 

CRISIL Ratings expects the capital profile for the company to remain comfortable over the medium term, supported by regular capital infusion, demonstrated ability to raise capital, and healthy internal cash accruals; thus, providing cushion against asset-side risks.

 

* Healthy earnings profile, partially constrained by higher provisioning expenses

Earnings are supported by a large proportion of high-yield businesses and competitive borrowing costs. For first nine months of fiscal 2022, return on managed assets (ROMA) remained healthy at 3.5% against 2.8% for fiscal 2021, albeit moderated, compared to 3.8% in fiscal 2020. The impact on earnings in the first 9 months of fiscal 2022 and fiscal 2021 was on account of elevated provisioning partly also due to accelerated provisioning due to Covid-19, however the same moderated in Q3 of fiscal 2022. In first nine months of fiscal 2022, the company had made provisions of Rs 3,958 crore on standalone basis and Rs 4,102 crore on consolidated basis. Further, BFL had interest reversals of Rs 779 crore in first nine months of fiscal 2022. Nevertheless, earnings profile is supported by higher fee income and comfortable net interest margins. Additionally, the company has increased efforts to diversify earnings by focusing on various fee-based income avenues, such as existing member identification cards, co-branded credit card and third-party product distribution.

 

Nevertheless, earnings remain susceptible to high credit costs, especially during continued macroeconomic stress, despite the conservative provisioning policy. With CRISIL Ratings-adjusted provision coverage ratio at 56% as on December 31, 2021, the coverage was in line of that of peers. While BFL's profitability may moderate as the proportion of mortgage loans increases under its housing finance subsidiary, it is expected to remain better than that of peers over the medium term.

 

* Strategic importance to, and strong expectation of support from, the Bajaj group

BFL is strategically important to the Bajaj group, the company gets significant financial, managerial and operational support from its parent, Bajaj Finserv. It also derives synergies from being a captive financier for Bajaj Auto Ltd (Bajaj Auto; rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'). BFL is one of the crucial entities of the group's financial services business, and its established track record of profitable growth enhances its strategic importance. BFL also plays a critical role in helping Bajaj Auto meet its sales targets and maintain market share; it financed around 36% of Bajaj Auto's sales volume in fiscal 2021, from 20% in fiscal 2010.  CRISIL Ratings believes BFL will continue to receive support from the group.

 

Bajaj Finserv's financial flexibility has steadily improved over the years supported by performance of its operating companies including insurance ventures. In the unlikely event of BFL requiring group support in an extraordinary situation, Bajaj Holdings and Investment Limited has ample liquidity in the form of cash and bank balances and portfolio of quoted investments to address the requirements. In addition, CRISIL Ratings believes that there is sufficient flexibility inherent in the market standing of the various listed and unlisted financial services firms in the group. CRISIL Ratings also believes that the financial flexibility will be sufficient to support any material requirements of BFL even if the group were to step up its stake in the insurance ventures.

 

Weakness:

* Focus on risky asset classes and under-seasoned mortgage loan book

On a consolidated basis, reported gross non-performing assets (GNPA) stood at 1.73% as on December 31, 2021 against 1.79% as on March 31, 2021 (1.6% as on March 31, 2020). Further, on consolidated basis, the group has done one-time principal write-off of Rs 3,973 crore in the first nine months of fiscal 2022 against a write-off of Rs 5,543 crore in fiscal 2021. In fiscal 2021 on a consolidated basis, restructured accounts were Rs 2,327 crore (in line with RBI resolution framework for COVID-19 related stress). Consequently, as on December 31, 2021, the GNPA including write-off for Q1 of fiscal 2022 was 3.88% on consolidated basis. The company has high exposure to asset segments such as personal loans and consumer durable loans (including life-style and digital loans), 2 and 3-wheeler finance, and unsecured business loans, which constituted around 55% of its standalone loan portfolio as on December 31, 2021, which are vulnerable to economic cycles. Further, BFL offers flexi loans option which has moratorium on repayment of principal across segments including consumer B2C, SME and Mortgages. As on September 30, 2020, BFL had flexi loans of approximately Rs 43,000 crore of which about Rs 10,350 crore of term loans were converted to flexi loans in Q1 and Q2 of fiscal 2021. CRISIL Ratings understands that further conversion from existing term loans to flexi loans has been minimal since Q3 of fiscal 2021. Due to inherent contractual flexibility in repayment, impact of second wave of Covid-19 on this flexi book generated in the last fiscal may not be immediately visible in the reported GNPA / GS3 numbers. CRISIL Ratings will continue to monitor overall asset quality metrics of Bajaj Finance for any potential risk emanating from this portfolio.

 

As on March 31, 2021, Rs 1,739 crore of restructured assets which are non-overdue, of the total restructured book of Rs 2,327 crore and these have been classified as stage-2 assets. The outstanding overdue restructured assets were Rs 208 crore in BFL and about Rs 32 crore in BHFL as on December 31, 2021. The outstanding non-overdue restructured assets as on December 31, 2021 was Rs 1453 crore. The company was holding a provision of 22% against these non-overdue assets as on December 31, 2021. Further, as on December 31, 2021, the company has a management overlay of Rs 1,083 crore as provision for any incremental stress. The company's ability to manage asset quality metrics going forward amidst the current environment remains a key monitorable. Nevertheless, the overall provisioning cover of the group was comfortable with 56% coverage ratio for stage-3 assets.

Liquidity: Superior

The liquidity profile of BFL on standalone basis is comfortable with positive cumulative mismatches across all short term ALM buckets (upto 1 year) in the asset liability statement as on December 31, 2021 with exclusion of committed lines in inflows. The liquidity position for the company too remains comfortable. As on February 28, 2022, BFL had total debt repayments of Rs 12,921 crore till May 31, 2022. Against this, they had liquidity (in the form of cash, equivalents and unutilised working capital lines) of Rs 18,268 crore.

 

ESG Profile

CRISIL Ratings believes that BFL’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on environment.

 

BFL has an evolving focus on strengthening various aspects of its ESG profile.

 

Bajaj Finance Limited’s Key ESG Highlights:

• BFL has constituted an executive ESG committee led by Deputy-CEO for implementing and monitoring ESG related aspects.
• BFL through its lending practices is largely retail focused and has been enabling financing to new to credit customers, rural areas, for women empowerment and strives to provide sustainable livelihood related financing products for its customers including MSME financing.
• BFL has started a carbon footprint assessment process across its business operations, and it is committed to take necessary measures to reduce its carbon footprint in a significant manner.
• The company has been doing CSR activities on a continuous basis which include Healthcare programs, Primary education initiatives, program to build BFSI skills to fresh graduates, shelters for underprivileged and orphan children. 
• Majority of the board members are independent directors, with segregation in chairman and executive position. BFL has a dedicated investor grievance redressal mechanism.

 

There is growing importance of ESG among investors and lenders. BFL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Outlook Stable

CRISIL Ratings believes Bajaj Finance will remain strategically important to, and continue to receive support from, the Bajaj group. The company will also sustain its healthy financial risk profile.

Rating Sensitivity factors

Downward factors:

• With the current AUM mix, any significant deterioration in asset quality translating into pressure on earnings profile thereby leading return on assets to drop below 2.0% on a sustained basis. This excludes any significant change in AUM mix due to an increase in the secured portfolio that will inherently impact return on assets negatively.
• Significant increase in consolidated leverage metrics
• In the unlikely event of Bajaj Finance requiring group support in an extraordinary situation the necessary support not coming forth from the group.

About the Company

Set up in 1987, BFL is a subsidiary of Bajaj Finserv (52.8% ownership), the financial services arm of the Bajaj group. BFL has a diversified product suite comprising key businesses such as vehicle loans (2- and 3-wheelers manufactured by Bajaj Auto), consumer durable loans, personal loans, mortgage loans, small business loans, loans against securities, commercial finance, and rural finance. BFL is the largest financier of 2-wheelers and consumer durables in India. Its standalone AUM was Rs 115,418 crore as on March 31, 2021 (Rs 116,012 crore as on March 31, 2020).

Any other information: Not applicable