Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Large, well-diversified NBFC

Bajaj Finance has emerged as one of the largest retail focused NBFCs in India and continues with its two-pronged strategy of building scale and 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 on ensuring profitability.

The assets under management (AUM) for the Bajaj group continued the growth trajectory and stood at Rs 230,842 crore as on December 31, 2022, a growth of ~17% year till date. This growth has been broad based across segments with the AUM consisting primarily of mortgages (loans against property [LAP] and home loans including LRD (33%), personal and consumer durables loans (27%), SME loans(13%), two- and three-wheeler financing (5%), rural financing (10%), loan against securities (6%) and others (6%). Given the strong growth in the mortgages business, BHFL accounted for almost 26% of the AUM.

Even at a standalone level, the AUM growth has been resilient with AUM at Rs 168,359 crore, a growth of ~15% year till date. This comprised primarily of personal and consumer durables loans (37%), mortgages (loans against property [LAP] and home loans including LRD (8%; erstwhile book which is running down), SME loans (18%), two- and three-wheeler financing (7%), rural financing (14%), loan against securities (7%) and others (9%).

At an overall level the composition of the portfolio over the years has tilted towards more of the secured book with the secured book accounting for over 55% of the AUM as on December 31, 2022, as against sub 50% four fiscals earlier.

CRISIL Ratings expects the growth momentum for the group to continue going forward, with the share of secured portfolio being in the range of 55-60% over the medium term.

Strong capitalisation levels

Capitalisation is robust, with sizeable consolidated networth of Rs 51,156.5 crores and adjusted gearing of ~4.0 times as on December 31, 2022. On the same date, the standalone networth stood at Rs 48,602.3 crore with adjusted gearing at 3.1 times. The group adopts a conservative gearing policy. Despite the strong growth registered in the past five fiscal,s the adjusted gearing has been below 6 times. Each time the gearing metrics have inched closer to 7x, capital raising plans have been initiated and concluded. This is supported by timely and regular equity raise as well as strong internal accruals.

The Bajaj group last raised equity of around Rs 8500 crores in November 2019 and has raised a total of Rs 14,908 crores in the past five fiscals. At the same time, the group has generated healthy internal accruals with profit after tax (PAT) of Rs 8,350 crores for the nine months ended December 31, 2022.

The healthy capitalisation enhances the ability to absorb potential losses on its portfolio; adjusted networth to net NPAs was healthy, at 56 times as on December 31, 2022 (34 times as on March 31, 2022) on a consolidated basis and at similar levels on a standalone basis as well.

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

The earnings profile of the group is supported by a large proportion of high-yield businesses and competitive borrowing costs. At a consolidated level, for the nine months ended December 31, 2022, the return on managed assets (ROMA) remained healthy at 4.6% (annualized) against 4.1% for full fiscal 2022. At a standalone level too, the ROMA remained healthy at over 5% for the nine months ended December 31, 2022 as against 4.1% for fiscal 2022.

The earnings profile is also 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. The earnings profile in fiscal 2023 has been supported by lower provisioning expenses of Rs 2,264 crore against Rs 4,622 crore in fiscal 2022. This implied a credit costs of around 1% for the nine months ended December 31, 2022.

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 64% as on December 31, 2022, 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.

Synergies with the ultimate holding company BHIL, and parent Bajaj Finserv

BFL is strategically important to the Bajaj group, the company gets significant financial, managerial and operational support from its parent, Bajaj Finserv. 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. CRISIL Ratings believes BFL will continue to derive on the benefits and synergies from the overall Bajaj 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.

Weaknesses:

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

On a consolidated basis, reported gross non-performing assets (GNPA) stood at 1.17% as on December 31, 2022 against 1.73% as on March 31, 2022. Further, on consolidated basis, the group has done one-time principal write-off of ~Rs 2500 crore in 9 months of fiscal 2023 as against Rs 4,738 crore in fiscal 2022. Consequently, as on December 31, 2022 the GNPA including write-offs was ~ 2.25% compared to 3.98% as on March 31, 2022. At a standalone level, the GNPA remained comfortable and stood at 1.45% as on December 31, 2022.

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 48% of its standalone loan portfolio as on December 31, 2022, 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 December 31, 2022, Rs 267 crore of restructured assets which are non-overdue, of the total restructured book of Rs 1,732 crore have been classified as stage-2 assets. The outstanding overdue restructured assets were Rs 88 crore in BFL and about Rs 179 crore in BHFL. The company was holding a provision of 23.6% against these non-overdue assets as on December 31, 2022. The company's ability to manage asset quality metrics going forward while continuing to scale up operations remains a key monitorable.