The recent action by the Reserve Bank of India (RBI) against Bajaj Finance, involving the suspension of its two lending products ‘eCOM’ and ‘Insta EMI Card’, has created a significant buzz in the financial sector. This move, prompted by the non-bank lender’s non-compliance with the RBI’s digital lending guidelines, has raised questions about its impact on Bajaj Finance’s operations and the broader market.
Overview of the RBI’s Action
- Reason for Action: The RBI directed Bajaj Finance to stop the sanction and disbursal of loans under its ‘eCOM’ and ‘Insta EMI Card’ products due to deficiencies in adhering to digital lending guidelines, particularly the non-issuance of Key Fact Statements (KFS) to borrowers.
- Key Fact Statements (KFS): These are meant to provide borrowers with essential information about their loans, including all fees and charges upfront, and details about recovery practices in case of default.
- Bajaj Finance’s Response: The company has temporarily suspended new loans under these products and is working to rectify the deficiencies.
Financial Implications for Bajaj Finance
- Consumer Durable Loans: For each month the issue remains unresolved, Bajaj Finance might lose around 500,000 consumer durable loans. These loans, with an average ticket size of ₹20,000, translate to about ₹1,000 crore in disbursements per month, or 0.4% of the current assets under management (AUM).
- Insta EMI Card Issuances: Bajaj Finance issues nearly 700,000 digital EMI cards quarterly. The suspension could affect the issuance of these cards, thereby impacting revenues. The one-time processing fee of ₹600 per card implies a revenue loss of ₹42 crore per quarter. Additionally, 30% of digital EMI cardholders availing a loan within three months could result in a further revenue loss of ₹23 crore, totaling an impact of ₹65 crore per quarter, which is 1.5% of profit before tax.
- eCOM Loan Volumes: Analysts estimate that the ban could affect 20-25% of consumer durable (CD) loans disbursed by Bajaj Finance, which comprise approximately 10% of total loans and about 15% of total profit.
- Stock Market Reaction: Initially, Bajaj Finance’s shares dropped by 4.1% but later recovered. Analysts at Jefferies retained their ‘buy’ rating, perceiving the RBI order as a “slight bump” rather than a long-term issue.
Broader Market Perspectives
- Analyst Expectations: There is a general expectation that the issue will be resolved quickly, mitigating any significant impact on earnings per share. The sentiment is that while there will be an impact on both AUM growth and fee income, the long-term outlook for Bajaj Finance remains positive.
- Consumer Perspective: The action by the RBI is seen as a step towards ensuring fair and transparent digital lending practices, which is crucial for protecting consumer interests in the increasingly digital financial landscape.
Conclusion and Future Outlook
The suspension of Bajaj Finance’s two key digital lending products highlights the importance of regulatory compliance in the fintech and digital lending sector. While the immediate financial impact on Bajaj Finance is expected to be minimal, the speed and effectiveness with which the company addresses the RBI’s concerns will be crucial in determining the long-term repercussions of this development. This situation underscores the evolving nature of digital lending practices and the critical role of regulatory bodies in maintaining fair and transparent lending processes. The market remains optimistic about Bajaj Finance’s ability to rectify the issues and resume normal operations, given the operational nature of the deficiencies highlighted by the RBI.