Analysts say RBI suspension may hit Bajaj Finance’s profits but outlook positive

Bajaj Finance expects the ban by RBI on lending via two digital products to be lifted within the next 45-90 days given that the deficiencies are expected to be rectified within two-three weeks, following which the RBI could review and approve the changes in the next four-five weeks, reports said.

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“If the embargo continues for a longer period, it may impact new customer acquisition as quarterly digital EMI cards acquisition account for 18-20 per cent of Bajaj Finance’s new customer acquisitions of around 35 lakh per quarter,” IIFL Securities said, adding that these cards are an important contributor to the fee income may thus drag on profitability.

RBI directed Bajaj Finance to stop sanctioning and disbursing loans under the ‘eCOM’ and ‘Insta EMI Card’ products, effective immediately. The ban has come as a result of the lender not issuing Key Fact Statements (KFS) for these loan products, or there being deficiencies in the ones issued.

In response, Bajaj Finance said that it is now issuing KFS for the two lending products, and that it will undertake a detailed review of the KFS and implement requisite corrective actions at the earliest. It added that it expects “no material financial impact” due to this temporary suspension.

Bajaj Finance instant EMI card offers pre-approved sanctions up to ₹2 lakh for online and offline purchases. ‘eCom’ includes online personal and business loans with flexible features wherein the NBFC financed 28 lakh e-commerce purchases in FY23.

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The lenders added 35.8 lakh customers in Q2FY24 and 6.78 lakh EMI cards were acquired digitally, comprising 19 per cent of the total customers acquired during the quarter. It disbursed 3.46 lakh B2B loans through digital EMI cards in Q2, which represented four per cent of overall loan disbursements for the quarter. Overall EMI card franchise stood at 4.19 crore, while the digitally sourced EMI card franchise stood at 42 lakh, comprising 10 per cent of the outstanding EMI card base and 5.5 per cent of the total customer base.

“We think these numbers look high, and for this reason, we are surprised by management’s comment of minimal operational impact,” Macquarie Research said adding that it expects the bank to be revoked in less than 12 months.

The NBFC could lose out on e-commerce new loan volumes of 3.45-6.90 lakh. Further, while there is no restriction on issuing new Insta EMI Cards, acquisitions are expected to decelerate due to the restrictions on digital loan disbursals, analysts said.

“We earlier estimated a 10 per cent y-o-y growth to 31 lakh e-COM transactions in FY24. The silver lining is that this RBI Ban has come after the festive period, wherein Bajaj Finance generates 3.5-4.0 lakh loans monthly on e-commerce platforms,” Motilal Oswal Securities said.

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“With an expected monthly run-rate of 2.2-2.3 lakh loan volumes on e-commerce platforms and 1.1-1.2 lakh B2B loans originated through the Insta EMI Card, we believe Bajaj Finance might have to compromise on loan volumes of 4.5-9.0 lakh over 45-90 days,” it said, adding that disbursements could fall by ₹1,360-4,500 crore or 0.5-1.6 per cent of AUM.

However, CLSA, Jefferies and Motilal Oswal continued to hold a ‘buy’ rating on the stock, whereas Citi had a ‘neutral’ rating, Morgan Stanley was ‘overweight’ and Macquarie had an ‘outperform’ rating. The price target for shares of the company was in the range of ₹8,375-10,300. Bajaj Finance’s AUM is expected to grow at 26-31 per cent in FY24.

Brokerages said that while the ban could hit profitability by up to six per cent, and the stock would remain under pressure for some time; the non-adherence seems to be on account of the non-classification of some loans as ‘digital loans’ and is thus a more operational issue. Further, it is likely to be corrected in the next few quarters, thus mitigating any major impact on the earnings per share.

“Considering shorter payout terms for such loans (maximum 24 months) as well as low turnout from cards in force to loans booked (around 50 per cent), we assume overall impact on quarterly AUM growth should be in mid-single digits,” InCred said in a note.

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