Bajaj Finance Hikes Credit Cost Guidance As Rural Business Hurts

Bajaj Finance has increased its credit costs guidance to 2.00-2.05% for the current financial year from 1.75%-1.85% earlier, Managing Director Rajeev Jain said in a post-earnings analysts call.

"Default rates are still lower, portfolio quality is increasing, and flow rates are higher... We are cautiously optimistic, and we hope that the environment remains stable. As you move through, then you will see the book starts to come back to 185-195 basis points," Jain said.

The reason behind this hike in credit cost guidance is because the company said it is experiencing stress in its rural B2C loans and two- and three-wheeler finance.

"Clearly, that portfolio (rural B2C) has grown in single digits in the last six quarters. We foresee that the portfolio will remain yellow. We only expect that business to grow by only 12–14% on a full-year basis," Jain said.

On a consolidated basis, assets under management of the non-bank lender clocked a growth of 29% on year to Rs 3.73 lakh crore. The management expects to grow AUM by 27-28% on year for 2024-25 (Apr-Mar).

In terms of outstanding numbers, mortgages contributed the most to the overall AUM to Rs 1.15 lakh crore, up 27% on year and urban B2C loans grew 33% on year to Rs 77,239 crore. SME lending was up 10% on year to Rs 44,382 crore and two and three-wheeler finance at 15% on year to Rs 18,960 crore. Rural B2C loans grew 10% on year to Rs 18,815 crore.

The management remains cautiously optimistic on rural B2C loans. According to Jain, if the company witnesses 12-14% on-year growth in the rural B2C segment in the current financial year, then it can grow 23-25% next year.

The management's overall strong AUM growth guidance comes as it plans to wind down its two-wheeler business in the next two years.

As the company's financing to Bajaj Auto Limited's customers, which set up its own captive financing unit, Bajaj Auto Credit Limited had reduced considerably. In June 2022, Bajaj Finance started non-Bajaj Auto for two-wheeler financing business and Bajaj Auto Credit started its operations in Jan-Mar.

On the margin front, the non-banking financer also said that as the cost of funds starts to come down, the benefit in net interest margins will be visible with a lag effect in one or two quarters.

While cost of funds rose by three basis points on quarter to 7.97% at the end of September, Bajaj Finance expects it to have peaked at the end of the September quarter, according to the company's investor presentation.

“We forecast that on a 12-month basis, a 25 basis point drop in repo rate should clearly lead to a 10-12 basis point improvement in NIMs. However, we would like to use the improvement in NIMs to our advantage to grow the secured segment,” he said.