The Reserve Bank of India (RBI) has suspended two products of India’s one of the biggest consumer financing companies, Bajaj Finance. To align with the digital lending rules set by the central bank, Bajaj Finance and Bajaj Finserv have been ordered to stop lending under eCom and Insta EMI cards with immediate effect.
Why this suspension?
As per RBI, Bajaj Finance has been reluctant to adhere to the guidelines set for digital lending. RBI has stated that the company do not share the key information with the borrowers for these two products.
Bajaj Finance did not issue key information to borrowers under the eCOM and Insta EMI Card lending products, the Reserve Bank of India (RBI) said in a statement. [Source: NSE] There were deficiencies in information for other digital loans and the restrictions imposed will be reviewed after Bajaj Finance rectifies these deficiencies, the RBI said.
The Key information is shared in the Key Fact Statement (KFS) which must include the interest rate which applies to the amount borrowed by the borrower, and then the recovery mechanism of the loan if the borrower fails to pay EMIs.
Effect on Bajaj Finance Revenue
Both eCom and Insta EMI cards are two of the most popular products of Bajaj Finance. A significant portion of the company’s fee income comes from these two lending products. In the Q2FY24 itself, 19% of the total customers acquired during the quarter were with these two products. Around 6.78 lakh EMI cards were sold digitally during the quarter.
Looking at the figures, it is quite evident that the company generates quite a lump sum revenue from these two products.
Thus, Macquarie Research commented, “We think these numbers look high, and for this reason, we are surprised by management’s comment of minimal operational impact,” Macquarie Research added that it expects the bank to be revoked in less than 12 months.
What it means for the investors?
Let’s now look at the effect of this suspension on the investors of Bajaj Finance on both short-term and long-term basis.
After the RBI’s suspension on Wednesday, the stock price of Bajaj Finance dipped from 7360.85 to 7224.30. However, again yesterday, it went up to 7362.45. [Source: NSE]. Today, the stock is currently at a low of 1.72% from yesterday’s closing price, which made the stock quite volatile after this order.
As per analysts, the effect of this ban will be short-term as the company’s fundamentals look strong. In addition, the ban can be revoked in the coming months if Bajaj Finance rectifies the issues and adheres to the guidelines. RBI has done it for other financial services in the past as well.
Brokerages said that while the ban could hit profitability by up to six percent, and the stock would remain under pressure for some time, the non-adherence seems to be due to the non-classification of some loans as ‘digital loans’ and is thus a more operational issue. Further, it will likely be corrected in the next few quarters, thus mitigating any major impact on the earnings per share.
Snapshot of Bajaj Finance Financials (Rs. Crore)
|Net Interest Income (NII)||17242||28846||21894|
The financials are impressive and have grown in the past three years. The PAT has surged by more than 63% between FY22 and FY23, further increasing during the first half of FY24.
What is Bajaj Finance’s take on this?
Bajaj Finance suspended any new loan sanction under these two products temporarily, and that will rectify the KFS as soon as possible for these two products. They have also commented that RBI’s decision will not have any material impact on their operations.
I’m Archana R. Chettiar, an experienced content creator with
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