Bajaj Finance's Growth Scare: A Red Flag For India's Retail Loan Boom?

Bajaj Finance is among India’s largest companies. An NBFC giant, Bajaj Finance's stock has returned nearly 1,600% to shareholders over the past decade, outperforming the broader markets by a wide margin. Moreover, the company went public in July 2002 and has returned a staggering 177,000% since its initial public offering. 

Despite these market-thumping gains, Bajaj Finance’s share price is down 7% from all-time highs, as the financial services giant lost momentum following its fiscal Q2 results. 

The NBFC giant's unexpected reduction in guidance during its earnings call has revealed an increase in stress within the MSME and unsecured lending sectors. So, let’s see if this is a Bajaj-specific blip or a warning sign for the entire sector.

Bajaj Finance saw its stock plummet by over 7% on Nov. 11, even as its consolidated net income rose by 23% year over year. 

This jarring disconnect between performance and perception reveals a more profound anxiety gripping investors, which can be best understood through the company's revised growth outlook and mounting credit quality pressures.

Bajaj Finance management delivered news that rattled investor confidence during its second-quarter earnings call. The company slashed its full-year assets under management growth guidance from 24-25% down to 22-23%. 

While still robust, the lower guidance indicates a pullback from the company’s aggressive expansion, which has defined the lender’s growth trajectory over the years. The revision is tied to a 25% cut in MSME (micro, small, and medium enterprises) business volumes. 

Bajaj Finance expects this segment to grow by 11% in fiscal 2026, down from an earlier target of 18%.

Moreover, its subsidiary, Bajaj Housing Finance, lowered its growth expectations due to heightened competitive intensity and higher-than-expected customer attrition.

The management explicitly emphasised that they have taken "significant risk actions" in the MSME segment, which indicates lending stress across the board. 

However, the festive season provided some comfort, with Bajaj Finance disbursing a record 6.3 million loans during the 35 days from Navratri to Bhai Dooj, representing a 27% increase in volume. Yet even this strong performance couldn't overcome concerns about the underlying portfolio quality.

Investors are also worried about Bajaj Finance’s rising credit stress. Its gross non-performing assets rose to 1.24% in fiscal Q2, up from 1.03% in the previous quarter, and loan losses and provisions rose 19% to Rs 2,269 crore. 

Management now expects full-year credit costs to hit the upper end of their 1.85-1.95% guidance range. To put this in perspective, the company's loan loss to average assets under the finance ratio came in at 2.05% for the quarter, up from 2.02% in Q1.

The captive two-wheeler and three-wheeler financing business, which represents 1.5% of total assets, accounts for 9% of total loan losses.

This business is being phased out as planned, which should provide tailwinds for credit quality improvement in fiscal 2027.

However, the near-term picture shows stress concentrated in unsecured lending and MSME segments. 

The company's restructured loans increased to Rs 288 crore in the quarter, nearly double the Rs 150 crore anticipated after Q1. Management emphasised that they are mainly focused on restructuring activities, using it selectively as a tool to assist viable customers.

Despite the challenges, several positive undercurrents suggest this may represent a temporary speed bump rather than a structural problem.

Vintage metrics across three-month, six-month, and nine-month delinquency buckets show notable improvement, especially for cohorts originated after February 2025, when the lender implemented stringent underwriting standards. 

The rural business-to-consumer segment, which had been flagged with a yellow warning for two years, was upgraded to green status, which indicates management's risk mitigation strategies are beginning to bear fruit.

The company's customer franchise continues to expand at an impressive rate and has touched 110 million customers, an increase of 4.13 million over the last three months. Management now expects to add 16–17 million new customers for the entire fiscal year. 

Operating efficiency also improved, with the operating expense-to-net total income ratio declining to 32.6% from 33.2% in the prior year period. The cost of funds decreased by 27 basis points to 7.52%, and management expects this metric to remain between 7.5% and 7.55% for the remainder of the year, providing room for either margin expansion or competitive pricing.

The most significant long-term story, however, is buried beneath the near-term noise: Bajaj Finance's aggressive push into artificial intelligence. 

The company's FINAI transformation initiative is now eight to nine months into implementation, with senior management dedicating 12-15% of their time to this effort. Management has identified 123 high-impact areas across business lines and functions, with 80 planned to go live by February 2026.

The early results show promise as: 

• AI voice bots contributed Rs 2,000 crore of loan originations in the quarter alone, with 442 bots now operational. 

• AI-powered service bots resolved 85% of customer service issues. 

• In the business-to-business segment, 42% of loan applications underwent AI-powered quality checks, enabling the company to process 650,000 applications in a single day without compromising on operational or compliance risk. 

• All digital banners and 100% of video content are now generated using AI. 

• The company is piloting face recognition technology at 300 points of sale to identify existing customers and enhance their experience.

Management believes these AI capabilities will drive substantial productivity gains and cost reductions over the next 12–18 months, potentially offsetting some of the margin pressure caused by elevated credit costs. 

The gold loan business, which has reached Rs 12,000 crore and is expected to reach Rs 16,000 crore by the end of the fiscal year, demonstrates how quickly Bajaj can scale new verticals. 

Management targets Rs 27,000-30,000 crore in gold loans by March 2027, with 40-45% of monthly disbursements now being made digitally through the app, rather than through branches. 

For investors, the key question is whether the company's technology investments and diversified business model can offset near-term credit headwinds while positioning it for stronger growth once the MSME segment stabilises.

Analysts tracking Bajaj Finance forecast its sales to grow by 20% annually between fiscal 2025 and fiscal 2029. In this period, earnings per share are forecast to expand from Rs. 26.82 per share to Rs. 55.50 per share. 

Currently, Bajaj Finance stock trades at a forward price-to-earnings multiple of 31.7, which is similar to its 10-year average multiple of 32.5. 

Its annual dividend per share is also expected to grow from Rs. 4.40 per share in fiscal 2025 to Rs. 10.50 per share in fiscal 2029.

Given consensus price targets, Bajaj Finance share price trades at a discount of almost 5% in November 2025.