Bajaj Finance Cuts Back On Rural Consumption Loans On Elevated Risks

Consumer financier Bajaj Finance Ltd. is troubled by the amount of personal loan growth.

"We are a little troubled about the level of leverage in the system. The amount of personal loan growth is troubling us," Rajeev Jain, managing director at Bajaj Finance, told analysts in a conference call on Wednesday.

Bajaj Finance reported its quarterly results on Wednesday and the lender's standalone net profit rose 25.5% year-on-year to Rs 2,959 crore in the first quarter of FY24. Bajaj Finance's consolidated net profit also increased by 32% to Rs 3,437 crore in Q1 FY24. Its consolidated assets under management rose 32% year-on-year to Rs 2.7 lakh crore.

As part of its results, Bajaj Finance reported healthy asset quality metrics across all segments except one—the rural business-to-consumer segment. These are unsecured loans typically taken for direct consumption needs by customers from rural locations.

"We've seen some level of risk here and we've cut the business. Rest of the portfolios are in pristine health," Jain said. Bajaj Finance has observed an increase in leverage in the segment and has tightened its credit quality metrics, he added.

Outstanding loans in the rural consumer business were Rs 20,272 crore as of June 30, contributing 8% of the consolidated assets under management. The urban consumer business, which accounts for bulk of the personal loans extended by Bajaj Finance, stood at Rs 54,845 crore or 20% of the outstanding assets.

Lowering the loan-to-value ratio, asking for a higher interest rate, and not being aggressive in pushing certain segments are some of the ways in which lenders tighten their checks, Amit Khurana, head of equities and research at Dolat Capital, said.

In terms of growth in personal loans, it's too early to say if it's a concern, according to Khurana. "Trend is very evident that it is strong ... we need to keep a track of this parameter because that will be the first red flag which will emerge."

Preemptive Measures

"We're taking a set of preemptive actions in looking at aggregate leverage of the consumer—secured leverage and unsecured leverage," Jain said. It's a new normal that credit models must optimise for, he said.

In the rural areas, a higher proportion of customers as compared with urban areas might be new to credit and, hence, the credit score metric is not as prevalent, according to Parijat Garg, an independent digital lending expert.

Source of income, sector-specific risk—such as rainfall for agriculture—and the size of income are some of the other factors lenders typically take into account, Garg said.

"Most lenders maintain what is called a negative list or cautious list," he added. The lists help lenders filter out borrowers they would like to avoid. The lists are for outright rejection and also for putting a cap on the total loan amount, Garg said.

"We will be worried (about) this space (personal loans) when there is a broad-based economic slowdown taking place," Asutosh Misra, head of institutional equities research at Ashika Broking, said. At least for the next two to three years, there shouldn't be a concern on such loans, Misra said.

The supply-side outlook for such loans has not been the way it is in a long, long time, Jain said on Wednesday. With banks, NBFCs and fintech lenders chasing the retail lending pie in the market, the competitiveness and digitisation have also added to the pace of growth.

For its part, Bajaj Finance appears to be favouring prudence for a simple reason: "To ensure that we stay out of trouble but remain in the game," Jain said.