Detailed Rationale

CRISIL Ratings, based on the request of Bajaj Finance Limited (Bajaj Finance; BFL) and confirmation of IPA that CP outstanding as April 27, 2022 is Rs 9,235 crores, has reduced the quantum of rated commercial paper of BFL to Rs 20,0000 crore from Rs 35,000 crore. CRISIL Ratings has also reaffirmed its ratings on the bank facilities and other debt instruments of BFL at 'CRISIL AAA/Stable/CRISIL A1+'. CRISIL Ratings has also migrated its rating on the fixed deposit programme of BFL to ‘CRISIL AAA/Stable’ from ‘FAAA/Stable’.

 

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.

 

The rating migration follows the revision in CRISIL Ratings’ rating scale for fixed deposit (FD) programmes, which is now aligned with the SEBI-standardised 20-point long term scale. Previously, CRISIL Ratings used a 14-point scale for assigning ratings to the FD programmes of issuers. This alignment is in compliance with the regulatory guidelines as per circular issued by the Securities and Exchange Board of India (SEBI) on July 16, 2021 and the subsequent SEBI circular dated April 1, 2022, for standardizing the rating scales used by the Credit Rating Agencies.

 

This migration represents only a recalibration of the rating from one scale to another and does not reflect any change in the credit risk profile of the fixed deposit programme. It is neither an upgrade nor a downgrade of the underlying credit risk profile of the FD programme. (Please refer to CRISIL’s criteria for rating fixed deposit programmes for further details).

 

Consequent to redemption, CRISIL Ratings has also withdrawn its rating on debentures of Rs 1437.8 crore (See Annexure 'Details of rating withdrawn' for details) in line with its withdrawal policy.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 March 31, 2022, assets under management (AUM) registered a growth of 10% quarter-on-quarter (Q-o-Q) and 27% year-on-year (Y-o-Y) to Rs 146,743 crores on a standalone basis, primarily contributed by a growth in consumer finance, commercial finance and rural lending portfolios. The AUM consisted primarily of personal and consumer durables loans (35%), mortgages (loans against property [LAP] and home loans including LRD (10%), SME loans and vendor financing (21%), two- and three-wheeler financing (7%), rural financing (13%), loan against securities (10%) and others (4%).

 

At a consolidated level, the AUM registered a growth of 29% Y-o-Y to Rs 197,452 crores, with Bajaj Housing Finance Limited (BHFL) constituting 26% 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 (27%), mortgages (loans against property [LAP] and home loans; 32%), SME loans and vendor financing (12%), two- and three-wheeler financing (5%), rural financing (11%), loan against securities (8%) and others (5%).

 

The group has been reporting strong growth in the AUM over the past five years, growing at a CAGR of 27%. In the medium term, the group is expected to continue to outpace the industry.

 

Strong capitalisation

Capitalisation is robust, with sizeable standalone networth of Rs 42,056 crore and adequate Tier-I capital ratio and capital adequacy ratio (CAR) of 24.8% and 27.2%, respectively, as on March 31, 2022.Adjusted gearing was comfortable at 3.0 times as on March 31, 2022 on standalone basis and 3.8 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 34 times as on March 31, 2022 (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

Earnings are supported by a large proportion of high-yield businesses and competitive borrowing costs. For fiscal 2022, return on managed assets (ROMA) remained healthy at 4.1% against 2.8% for fiscal 2021. The earnings profile in fiscal 2022 has been supported by lower provisioning expenses of Rs 4,622 crore against Rs 5,721 crore in fiscal 2021 and also increase in the reported total income (net-off interest expenses) of Rs 20,298  crore in fiscal 2022 against Rs 16,100 crore in fiscal 2021. Additionally, BFL carries management overlay provisions of Rs 1,060 crore as on March 31, 2022 for any additional covid related slippages. 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.

 

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 58% as on March 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.

 

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.  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.

 

Weaknesses:

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

On a consolidated basis, reported gross non-performing assets (GNPA) stood at 1.73% as on March 31, 2022 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 4,738 crore in 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 March 31, 2022, the GNPA including write-off for fiscal 2022 was 3.98% 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 59% of its standalone loan portfolio as on March 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 September 30, 2020, BFL had flexi loans of approximately Rs 43,000 crore. Due to inherent contractual flexibility in repayment, 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, 2022, Rs 718 crore of restructured assets which are non-overdue, of the total restructured book of Rs 1,732 crore and these have been classified as stage-2 assets. The outstanding overdue restructured assets were Rs 983 crore in BFL and about Rs 31 crore in BHFL as on March 31, 2022. The company was holding a provision of 20% against these non-overdue assets as on March 31, 2022. Further, as on March 31, 2022, the company has a management overlay of Rs 1,060 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 58% 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 March 31, 2022 with exclusion of committed lines in inflows. The liquidity position for the company too remains comfortable. As on May 31, 2022, BFL had total debt repayments of Rs 13,827 crore till July 31, 2022. Against this, they had liquidity (in the form of cash, equivalents and unutilised working capital lines) of Rs 11,351 crore excluding collections. Liquidity profile is also further supported by collections of approximately Rs 11,000 crore for each month.

 

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