25 July 2019
It’s unusually pleasant for a May morning in Viman Nagar, a Pune suburb that adjoins the forested and tony Koregaon Park. A cool breeze is blowing across the terrace of the six-storeyed headquarters of Bajaj Finance, India’s most valuable lending company, just days after temperatures touched 42 degrees Celsius and the Deccan Plateau on which the city sits seemed to be radiating heat waves.
But come rain or sunshine, Rajeev Jain, managing director of Bajaj Finance, is at his desk at 7.30 a.m. every day. As we get ready for a meeting, Jain has a long day ahead. He has a visa interview and several re-view meetings as he prepares the final report for the previous financial year that will be discussed at a board meeting. Jain should have nothing to worry about. In the 11 years he has steered the company, revenues have grown from ₹503 crore to ₹13,466 crore in March 2018, a compound annual growth rate (CAGR) of 39%, and profits have jumped from ₹21 crore to ₹2,647 crore. In these years, Bajaj Finance’s market capitalisation has shot up from ₹900 crore to ₹1,10,000 crore, making it the Bajaj group’s most valuable company. And in the last quarter of FY19, its profits jumped 57% to ₹1,176 crore from the same period last year. Investors seem to love the story. In the aftermath of the carnage after a large non-banking finance company (NBFC), IL&FS, defaulted on its borrowings, Bajaj Finance was one of few stocks to recover lost ground. Its stock price rose to ₹3,131 in early May after losing a third of its value when it fell to ₹1,974 in October 2018.
Yet Jain is driving his employees hard. He says he has made it mandatory for the 3,000 employees at his company to work an extra Saturday. Bajaj Finance used to work alternate Saturdays but from April 1, it works three Saturdays a month. “Most family shopping happens on weekends and we need to be thereto evaluate risk and offer instant loans when the customer needs them the most,” says Jain.
Bajaj Finance Ltd (BFL) is a subsidiary of Bajaj Finserv, which holds 54.99% in the firm. Finserv also holds 74% each in two other subsidiaries, Bajaj Allianz General Insurance and Bajaj Allianz Life Insurance, which together constitute the financial assets of the group.Though accounting norms allow Finserv to add BFL’s sales to its consolidated revenue, the two companies are separate listed entities and are together valued at ₹2,50,000 crore. HDFC, classified as a housing finance company (HFC) and with a market capitalisation of ₹3,32,000 crore, is the only non-banking finance company that is more valuable than the two Bajaj firms.
Their success is even starker when you pitch them against other Indian industrial conglomerates like the Birla group’s Aditya Birla Capital, the Mahindra Group’s M&M Financial Services, Reliance Capital, Larsen& Toubro Finance Holdings, and Tata Capital, which have existed as long as Bajaj but are valued at only a fraction of its market capitalisation. “Bajaj Finance is an outlier among finance companies in India as its management successfully executed a strategy for giving retail loans that others could not,” says Abhiram Eleswarapu, head of India equity research at BNP Paribas.
It wouldn’t matter even if Jain slowed down a bit as none of his competitors, including banks, have managed to build a large retail franchise to give loans to individuals. Still, he is constantly moving the goal post for his team. In less than a decade from now, he wants 50% of his business to come directly from digital channels, like mobile phones and websites, and not through intermediaries or agents. Today, only 8-18% of its business originates directly from customers using digital channels. Traditionally, Bajaj Finance’s unique value proposition was having are presentative at brick-and-mortar stores that sold consumer durables or Bajaj vehicles. But increasing sales of consumer durables through e-commerce channels like Amazon and Flipkart have begun disrupting Bajaj’s credit business. And bigger banks like Axis, ICICI, and State Bank of India (SBI) have also begun to snare online customers by offering exclusive discounts for using a credit card to pay for purchases and automatically allowing customers to pay by EMIs. For example, at the electronics and appliances retail chain Croma, an LG washing machine with a sticker price of ₹24,000 worked out nearly 5% cheaper if paid through an HDFC Bank credit card rather than a Bajaj EMI scheme.
Jain’s plan has been in the works for nearly two years. Over 100 data scientists and analysts have been hired by Bajaj Finance to analyse customer data generated from millions of customers that the company gives loans to every year. They want to predict customer behaviour and suggest appropriate products for new customers on the go. That’s not an easy task. Typically, a customer uses financial services of several intermediaries like banks, credit cards, and payments companies at any given point of time; no single player has a complete picture of the customer’s spending habits. For example,if a customer pays a cab-hailing company through a payment app for his daily commute to work, his bank will not know his travel schedule to suggest offers on the way, but his mobile phone, cab, and payment services companies can do that. “India is in a wonderful position to leapfrog decades on the technology side and, therefore,create business innovations because of the government’s Unified Payments Interface (UPI), which enables easy and cheap transaction costs,” says Sanjiv Bajaj, managing director of Bajaj Finserv. Akshay Mehrotra, CEO and co-founder of Pune-based fintech Early Salary, adds: “The cost of running a digital business will finally rest on the efficiency of the predictive engine.”
But the digital loans business is crowded and the Bajaj companies will have to fight for space. In the last three years, a slew of fintech companies has raised money to offer services from payments and personal loans to microfinance. Biggies like Paytm, Jio Money, WhatsApp, and Google Pay are expected to vie for the payment play, which has seen top dollar investment from global private equity firms. Companies like EarlySalary offer loans to salaried employees who face a temporary crunch towards the end of the month or for exigencies.Unlike banks or traditional firms, EarlySalary is a digital-only player. In three years, it has disbursed nearly ₹1,000 crore in small-ticket loans and is growing rapidly. To qualify for early salary loans, a customer has only to send his identification and a bank statement, and loans are ready within hours if an applicant qualifies.
With the ground shifting under its feet, consumer finance leader Bajaj Finance was forced to push for a new digital strategy. Last year, it had 702,000 purchases on e-commerce platforms, up from 167,000 in the previous year,a growth of 320%. In the next six months, Bajaj Finserv will launch several new initiatives to increase its digital footprint and direct interface with consumers. The company will place its widgets, or small software programmes, on 400-500 popular online destinations like education websites to offer loans as students prepare to enroll for a course. Later this year, a yet-to-be-disclosed platform, codenamed FinservDirect, will launch a hyper local online store that will stock consumer durables and other lifestyle products and allow customers to get deliveries from neighbourhood vendors in less than 12 hours. Customers will be able to directly access any product, be it loans or insurance, on the website. The idea is to leverage the Finserv brand name and get customers to transact digitally on its e-commerce platform. Says Tapan Singhel, managing director and CEO of Bajaj Allianz General Insurance: “There is no doubt that insurance companies will need a digital strategy as that is going to be the most used medium but we need to innovate if we want the customer to choose us there.”
Last year, Bajaj Finance financed 9.9 mil-lion purchases, most of them in the consumer durables space. Therefore, the company has an ongoing relationship with several vendors across the country. The hyper local website that Finserv is talking about will carry over 100,000 different products from its existing pool of vendors, there-by helping develop an alternative e-commerce strategy for them. Finserv will be the priority lender if the customer wants a loan to make purchases. “Directionally, we are talking about a portfolio of digital assets that will address the issue of e-commerce companies taking away customers and at the same time increase the visibility for our products,” says Manev Mianwal, group marketing head, Bajaj Finserv.
To understand the new initiatives, we need to step back a bit to see what makes Bajaj Finserv and Bajaj Finance tick. A little over a decade ago, the group’s finance business was started as a subsidiary of Bajaj Auto, which sold motorcycles and three-wheelers. Then called Bajaj Auto Finance, it primarily financed the purchase of Bajaj vehicles exclusively though it also did some consumer durables financing. In April 2007, a decision was taken to separate the finance businesses to enable capital infusion and accountability without affecting the auto business.
By September 2007, Sanjiv had already hired key personnel including Jain as CEO of Bajaj Finance, which would be the lending arm of the group. But soon after, the Lehman Brothers-triggered financial crisis struck and Bajaj Finance’s gross non-performing assets stood at over 10% of its books. The company ended up with profits of ₹20 crore on revenues of ₹410 crore in March 2008. Though sales increased from ₹353 crore in the previous year, profits dipped from ₹47 crore. BFL was then present in 400 cities and had 9,000 people on its rolls.
Hiring Jain, who had worked earlier in GE Money and American Express, proved to be a great move.
Jain had done stints in consumer durables lending, auto loans, and personal lending, and he had worked in multinationals fora major part of his early career. Subsequently, the top 100 early hires came from GE and Amex. The early build-up of the business was over-seen by Nanoo Pamnani, a Citibank veteran. Says Sanjiv Bajaj: “Since we knew that the business had very thin margins, right from the start we architected the business for very high operational efficiency.”
To bring down non-performing assets (NPAs) and institute processes, Jain shut down operations in 330 cities and also pruned staff strength to 3,000 before rebuilding the organisation. He says that to build a consumer and SME loan portfolio, there are five key blocks that need to be executed correctly: customer acquisition, big product portfolio, risk management, collections infrastructure and finally, superior profitability. With Pamnani overseeing operations, Jain started rebuilding the business by enrolling bigger and credit-worthy retailers. “We decided that we would give money not to the one who desperately needs it but to those who currently didn’t want it,” says Jain.
So, instead of making the customer pay interest on purchases, Bajaj Finance tied up with manufacturers to foot the interest and offered zero-cost loans to customers. Further, Jain ensured the time required to sanction loans was brought down to 30 seconds from three to four days. The formula hit the right target. Starting in 2010, Bajaj Finance again started growing fast and by the time Jain took over as managing director in 2015, the company was on a roll. As of December 2018, the company had 1,720 branches and offered loans at 84,000 distribution points in the country. Retail loans to consumers account for a third of its business and another third comes from home loans. The rest is from commercial lending to SMEs, trade finance, and increasingly to the farm sector. A third of the nation’s consumer durables sales are routed through Bajaj Finance’s network and the firm has over 35 million customers.
If retail loans account for just a third of the business, why is the market valuing Bajaj Finance so high? The answer lies in the company’s financial health: In the past five years, its revenues have increased at a CAGR of 27% while net profit increased 30%, according to data from Prowess and Capitaline. It has emerged as one of the biggest wealth creators in India with its average annual market capitalisation leaping 58% in five years to ₹1,40,143.1 crore on March 31,2019, putting it at the 4th spot in Fortune India’s inaugural Wealth Creators list. Bajaj Finserv is No. 16 on the list. “Over the years, Bajaj Finance has clearly demonstrated that it has been able to cross-sell different products to its customers. It appears that it has a huge pool of unique customers which they can serve during the investment life cycle,” says Alpesh I Mehta, deputy head of research at broking and investment firm Motilal Oswal.
The key lies in what the Bajaj companies did beyond acquiring millions of customers. Over the years, BFL, and to a smaller extent Finserv, have been using data collected from customers visiting retail outlets in many ways. In 2015, it launched and offered an EMI card to customers who already had a relationship with Bajaj Finance. Customers paid ₹300 for the card and there are over 12.9 million customers who can use the card to buy a million different products. The card offers instant loans at 43,000 outlets. Keeping in tune with the times, the EMI card is available digitally on smartphones. Recently, Bajaj Finance has also been selling general insurance and life insurance products of Bajaj Allianz through its agent network, giving it insights into an expanded set of customers. The company says it has access to data on more than 80 million customers across all its businesses. “The Street is not treating the Bajaj group finance companies as plain-vanilla NBFCs. Clearly investors are valuing them on a par with a successful fintech based on their access to a huge pool of customers,” says finance veteran Amit Goenka, managing director and CEO of Nisus Finance Services.
It is this background of a huge customer base that makes Sanjiv’s new plan more potent. After Jain started in Bajaj Finance,he had already successfully reduced the turnaround time to disburse loans to 30 seconds, especially if the customer possessed a credit card and had a CIBIL credit rating above 750. However, loans were still given to only those customers who walked into a consumer durables outlet and any other touch point where they could share their data. In the new scheme of things, the two companies will try to push loans just as customers make a decision on a purchase. “We want to go from apply now to get it now,” says Mianwal.
Typically, for Bajaj, there are two sets of customers—one with whom the company already has a relationship and second, completely new customers. When an existing customer visits a Bajaj digital interface like a website and identifies herself, the company captures over 150 attributes like the IP address from which she is operating, the handset she uses, her age bracket and any previous relationship she has with them. This information is then used to offer her suitable loans: For example, if she is 30 years old and searching for a school, Bajaj Finance will prompt her with a loan to pay initial school deposits.
In case the customer is new to Bajaj’s services, then the digital marketing efforts kick in. For example, the company has targeted the medical community by tying up with networking app Curofy which has over 300,000 enrolled doctors. Mianwal is now pushing content on trends in the medical profession while also placing his widget on Curofy so doctors who want to buy the latest equipment can get loans.The company is also targeting data on chartered accountants who help SMEs with their finances. Mianwal says early results show the traction from the new initiatives for these smaller sets of audiences is impressive.
These efforts of targeting new customers through digital marketing already account for 10-12% of overall digital revenues. Last year, 8% of consumer loans came through digital channels. Mianwal is confident that this revenue will grow quickly. Even though Bajaj Finance has pro-files of 10 million unique customers for the online habits, existing and potential customers clock 116 million sessions on the company’s various digital interfaces. The company expects to increase revenue from this stream as that number increases to 20 or 40 million customers in the coming years.
These are still early days. The company recently hired a designer for the user interface and user experience for customers visiting its digital properties. In its insurance business, it is working up policies for common, day-to-day applications that will be attractive to online customers.For example, in its general insurance business,for ₹1,000, a customer can buy insurance for the electronic car key of a Mercedes, which costs upwards of ₹2 lakh to replace. There are policies for expensive spectacles too. Says Tarun Chugh, managing director and CEO of Bajaj Allianz Life Insurance: “Our unit-linked insurance plans area great hit in the digital medium largely due to young and millennial customers. There are lessons to be learnt there.”
In many ways, Sanjiv Bajaj has no option but to step on the gas. Last month, new competition suddenly hit Bajaj Finance out of the blue when India’s biggest wallet company, Paytm, tied up with Citibank to launch its own credit card. Paytm has 300 million customers and it hopes to give credit cards to a small percentage of its customers. They can even pay for their credit card purchases through EMIs. Will Bajaj Finance be able to take on the competition? It’s certainly leaving no stone unturned in its efforts.