Bajaj Finance in the year 2019 became a hit among investors. In October, it was reported that investors had priced Bajaj Finance more than India's largest lender i.e., the State Bank of India (SBI) with a balance sheet 14 times the size of Bajaj Finance's book.
How did Bajaj Finance become a superstar? Read on and find more below.
Bajaj Finance Limited, a subsidiary of Bajaj Finserv, is a Non- Banking Finance Company that deals in Consumer Finance, Small and Medium Enterprises, Commercial Lending and Wealth Management.
What makes Bajaj Finance investors' favorite?
One of the most significant reasons for such robust growth is the company's first mover advantage in the arena of consumer lending. Its interest-free Equated Monthly Installments (EMI) has worked wonders in the Indian Market which is also known as its Small Ticket Model. For many quarters, the company has reported roughly 50% growth. Irrespective of the fact that most of the loans extended by it are unsecured loans, it has high asset quality metrics, which makes it a pretty good choice among investors.
While banks target corporates since they are margin friendly, they are still unable to beat Bajaj Finance for its ability to price risk. The ability to make sound decisions in the financial world is what makes Bajaj Finance stand out.
Bajaj Finance vs Banks: What differentiates Bajaj Finance from the big banks?
Even though big lenders such as the State Bank of India boast their big balance sheets, ultimately the size would not be of any use if it could not generate profits.
One of the major reasons that eats up the profits of big public sector banks is rising NPA (Non-Performing Assets). If we look at the figures of Financial Year 2019 for both Bajaj Finance and SBI, it is astonishing to see that while the former generated net profits Rs 3,995 Crore, the latter reported a mere figure of Rs 862 crore.
Even as we look at the first quarter of Financial Year 2020, the difference between the net profits of SBI (Rs 2,312 crore) and Bajaj Finance (Rs 1,195 crore) is not very significant. This shows how badly the problem of bad loans has plagued the banking sector that has, in turn, shunned investors.
The problem of bad loans certainly lowers the growth prospects of the banking sector while skewing growth prospects towards NBFC’s such as Bajaj Finance. This is because of the fact that banks such as SBI will have to set aside profits towards bad loans while Bajaj Finance could utilize its profits and become more competitive.
Another major factor that gives Bajaj Finance an edge is its business model, which rests on Equated Monthly Installments (EMIs) or the Small Ticket Model. This is one of the fantastic moves in the arena of consumer lending wherein individuals make equal monthly installments to fund their desires and which also is a very popular model in the gadget world.
Even in rural areas, where consumers have the purchasing power to pay in cash, around 70-80 percent prefer the financing model. This model, therefore, makes Bajaj Finance add millions of customers to its kitty every year, a growth that is surely unbeatable. This model furthermore makes Bajaj Finance an outlier among the finance companies and definitely puts it into a strategic advantage.
Even though, as an NBFC, Bajaj Finance cannot accept deposits that take its cost of raising funds to a higher-end, its superior margins are surely a lifesaver.
Even during the NBFC Liquidity crisis, which jolted the entire NBFC industry, it has time and again proved that it could escape any liquidity crisis. Even on the worse days, it can reduce asset-liability mismatch and borrow from the market.
One of the most significant advantages which has consistently driven the growth of Bajaj Finance is its small ticket model or what we have above noticed as an EMI business model. Ultimately, it is a strategic model and its strategic execution, which makes a company's fundamentals rock-solid, thus making it a hit among the investors.