Bajaj Finance Faces Setback as RBI Imposes Restrictions on Key Products

On Thursday, Bajaj Finance experienced a nearly 4% decline in its share price, triggered by the Reserve Bank of India’s (RBI) decision to prohibit the non-banking finance company (NBFC) from lending under two of its prominent products. The affected products, namely ‘eCOM’ and ‘Insta EMI Card,’ faced an immediate halt in sanctioning and disbursing loans due to non-compliance with the issuance of Key Fact Statements (KFS). This move by the central bank has raised concerns in the market about the operational and regulatory practices of one of India’s leading NBFCs.

Immediate Impact on Share Price:

Bajaj Finance shares saw a significant dip, declining by as much as 3.97% to ₹6,937.15 apiece on the Bombay Stock Exchange (BSE). The directive from the RBI specifically pointed out deficiencies in the KFS issued for these two lending products, prompting the regulatory body to impose supervisory restrictions until the issues are rectified to its satisfaction.

RBI’s Directives and Bajaj Finance’s Response:

The RBI’s directives explicitly instructed Bajaj Finance to cease the sanction and disbursal of loans under ‘eCOM’ and ‘Insta EMI Card.’ The primary concern raised was the non-issuance of Key Fact Statements to borrowers under these lending products and deficiencies in the statements related to other digital loans sanctioned by the company. Bajaj Finance, in a regulatory filing, acknowledged the RBI’s concerns and committed to an immediate halt in loan activities under the specified products.

The company stated that it had been issuing KFS for loans under the mentioned products, but in response to the supervisory concerns, it pledged to conduct a detailed review of the statements and take necessary corrective actions promptly. While these supervisory restrictions are in effect, Bajaj Finance reassured stakeholders that there would be no material financial impact on the company.

Analysts Perspectives:

Market analysts foresee a limited impact on Bajaj Finance from the RBI’s move, considering that the Insta EMI Card constitutes only 5% of the company’s total client base. However, they anticipate short-term pressure on Bajaj Finance shares. CLSA, a prominent brokerage firm, expects a 6% impact on Bajaj Finance’s profits during the ban period but views this as more of an operational breach than a severe violation.

Motilal Oswal Financial Services, in particular, emphasizes that the RBI’s action seems more related to operational issues than a fundamental breach. The brokerage firm believes that Bajaj Finance will take corrective actions, and once successful in satisfying the RBI, its momentum will strengthen, especially with its robust digital ecosystem – app, web platform, and full-stack payment offerings.

Impact on Business Operations:

The immediate consequence of the RBI’s directive is the discontinuation of eCOM lending by Bajaj Finance on various e-commerce platforms such as Amazon, Flipkart, Yatra, and MakeMyTrip. The NBFC used to finance its existing EMI card customers for their purchases through these platforms. The restriction on Insta EMI Card acquisitions and issuances could potentially decelerate over the next 45-90 days due to limitations on digital loan sanctions and disbursals.

Motilal Oswal Financial Services provides a nuanced analysis of the potential impact on Bajaj Finance’s business operations. The brokerage firm notes that the RBI ban comes after the festive period, during which Bajaj Finance typically generates a significant number of loans on e-commerce platforms. Over the next 45-90 days, the company could potentially lose out on e-commerce new loan volumes, impacting its loan disbursements.

Financial Impact and Market Response:

Assuming average ticket sizes of ₹30,000, ₹40,000, and ₹50,000, Motilal Oswal estimates an impact on disbursements between ₹13.6 billion and ₹45 billion, considering a 45-90 day embargo period. This would translate to a potential decline of 0.5%-1.6% of Bajaj Finance’s Assets Under Management (AUM) as of September 2023.

Despite the immediate market reaction, Motilal Oswal maintains its ‘Buy’ rating on Bajaj Finance’s stock. The brokerage suggests that any significant correction in the stock price purely due to this event should be seen as an opportunity to accumulate shares. It acknowledges the anticipated impact on AUM growth and fee income in the second half of FY24 but expresses confidence in the long-term prospects of Bajaj Finance.

Conclusion and Future Outlook:

In conclusion, Bajaj Finance faces a temporary setback as the RBI imposes restrictions on its key lending products. The immediate impact on share prices and business operations is notable, with concerns about the potential financial repercussions. However, market analysts, including Motilal Oswal Financial Services, express optimism about the company’s ability to address the regulatory concerns and recover its momentum in the long term.

As of 9:30 am, Bajaj Finance’s share price was trading 2.00% lower at ₹7,079.45 apiece on the BSE. The coming days will likely witness further developments as Bajaj Finance works towards resolving the operational issues raised by the RBI. Investors will be closely monitoring the company’s actions and the regulatory response, and any subsequent market movements will provide insights into the market’s confidence in Bajaj Finance’s ability to navigate through this challenging period.