Some upper-layer NBFCs can be good substitute for banks: Sanjiv Bajaj

In next 10-15 years, India needs around four large capable, mature NBFCs, says Bajaj Finserv's Chairman and Managing Director Sanjiv Bajaj

Bajaj Finserv and Allianz have decided to part after 24 years of being in a joint venture in insurance. Sanjiv Bajaj, chairman and managing director, Bajaj Finserv, talks to Manojit Saha and Subrata Panda about the Munich-based insurer’s decision to exit the joint venture and the future of the two insurance companies (general and life) in the group. He says the Reserve Bank of India (RBI) could allow some upper-layer non-banking financial companies (NBFCs) to serve as substitutes for banks without giving them the banking licence. Edited excerpts:

 

What was the trigger for Allianz’s exit?

 

For both promoters the India opportunity and the India story were common. What we understood is that for them (Allianz) a presence in ths country was important. In their strategy on how to approach India, they want to be able to control the venture they are in. That is the reason why we amicably signed an agreement to part ways and I am sure at some point they will announce their India plans.

 

There is a non-compete agreement, which will dissolve when we buy the first 6.1 per cent from them after we get regulatory approval. They are a good, mature partner. We built a fabulous business over the last 24 years. Now, their interests are different from ours. We will compete with them in the Indian market if and when they come.

 

Can you throw some light on the deal structure?

 

Allianz wanted to exit as soon as possible with regulatory approval and we were fine with that. What it meant was we should be able to buy them out, particularly the first 6.1 per cent, and even the rest, as early as possible. Hence, we looked for funding within the group because if we were to raise money outside, that would take time. Bajaj Finserv cannot borrow because it is a core investment company. So, Bajaj Finserv’s stake will go up to 75 per cent from 74 per cent (in the two insurance companies, general and life) so that we have complete control over them. And then two group companies, Bajaj Holdings and Jamnalal and Sons, a family unlisted company, chipped in to provide the rest of the capital. That is the reason why three companies have got involved. It gives Allianz the confidence that this deal will happen early and fortunately we had the capital in the group to be able to fund this (stake buy).

 

Many in the market feel Bajaj Finserv got a sweet deal…

 

We found a balanced outcome, which met both sides’ priorities.

 

Would you like to bring in a partner for the insurance companies?

 

We have no plans for a foreign partner. We have been running the business, and were supported by Allianz. But it was the local team that has been running the business for two decades now. We have strong capabilities here and work with global partners on technology, risk, and reinsurance.

 

Both businesses are profitable. They did not require external capital for over 10 years. They have excess capital on the books now. Solvency is much higher than the statutory requirements of the regulator. So, both businesses are very healthy. The capital that Allianz and Bajaj invested from the beginning in the two companies is less than ₹1,500 crore.

 

What will be the change in strategy for the two insurance companies after Allianz’s exit?

 

There is no immediate change in strategy. This is because our strategy has been defined in terms of our long-range plans. But a few things will be tweaked. For example, now, if we want to introduce products for non-resident Indians, we will be free to do that. If we want dollar-based products, we can have them. If we want to set up an office in Gift City (Gujarat), that is possible. Earlier, it required Allianz’s approval. But these will be smaller opportunities at this point in time. They could develop into something large in the coming years. The broad strategy remains the same, which is what we have been working on year after year.

 

Growth projections also remain the same?

 

The team does a good job in balancing growth with profit. We have to keep in mind that eventually we are in the business of settling claims. As long as there is no fraud, we have built a capability that we must be fair and we must be fast. The better we understand risk using data, using technology, using AI, we can price that risk better.

 

We will start investing more in some of these capabilities and build on those.

 

Secondly, as we have built Bajaj Finance, Bajaj Housing Finance, the life insurance company, the general insurance company, etc., there are capabilities that each of these businesses has created, and cross-pollinating those ideas will become easier now. We will focus more on that.

 

Any leadership changes in these insurance companies?

 

No, nothing from our side at least.

 

The Insurance Regulatory and Development Authority of India (Irdai) has been nudging large insurance companies to list …

 

Since we have enough capital, it is not a reason for us to list. At some point in time, the companies get large enough, when the RBI as a regulator requires listing. Insurance laws don’t require listing. But I can understand that the regulators are nudging the older, larger companies because listing creates visibility. That’s why we are not against the idea. For us, when Irdai spoke to us, the big event was Allianz’s exit. We need to go through this in a smooth manner because there is a lot that has to be done. Once it is done, our board will evaluate whether to do it and decide on the timeline. Then there will be a new leadership at Irdai. We will see what its priorities are. So as we engage with them moving forward, we will have clarity also from their side.

 

What is the road map for listing?

 

The first thing was the Allianz exit. Then the board will discuss and decide the listing process. I don’t see us listing in a year or two.

 

Do you have any plans to float a standalone health insurance company or a reinsurance company?

 

Not at this stage. Health is an important vertical for us in our general insurance company. And it is going to be one of the most important lines over the next 20 years. Because as our population is growing, and as we start crossing $3,000 per capita, people have some money available in their pockets and then health becomes an important consideration. Health costs are increasing. So for that insurance would play an important role. So it's going to be a very important line for us.

 

Well, nothing prevented us from entering it (reinsurance) earlier. I think we have our hands full. But never say never. We will evaluate and see in the future.

 

There was an important development last week with Anup Kumar Saha being appointed managing director (MD) Bajaj Finance, and Rajeev Jain vice-chairman. What is your message to the new MD, who will take charge on April 1?

 

The key message is to continue to build the best lending business in the country, and focus on long-term growth and profitability. The focus should also be on the best frictionless experience for our customers, with a high level of innovation and empowerment for our employees.

 

These are some basic parameters that have helped us create a unique culture. And that’s what he needs to propagate. How he does it is his style and his way of doing it. And for us, in many ways, it is the smoothest way in which a transition can take place. We are there to support him. That’s why Rajeev continues in an executive vice-chairman role so that he can support Anup and the team. He and the team have to build the business for the next decade.

 

Jain has also been inducted into the Bajaj Finserv board. Will he play a bigger role in the group now?

 

Rajeev and I will guide and support him. Rajeev will also mentor some other businesses in Bajaj Finserv.

 

How do you look at competition from Jio Finance?

 

We don’t talk about what possible competition can do because we don’t know. But I do believe that for the kind of opportunity India has in the next 10-15 years, we need around four large capable and mature players. Because even now we see penetration needs improvement in lending products and other financial products. We have a set of strategies on how we grow. They are based on our risk appetite. They depend on how much we can do at a time. So overall the spread of financing is important. We have to remove the shackles. Of course we have to keep an eye on anything wrong that can happen or too much accumulation of risk. And we are mature regulators now. 

 

The RBI has been asking NBFCs to diversify funding sources. Is this going to be a challenge?

 

The scale-based regulation the RBI created for NBFCs is a good thing. As a result, within the thousands of NBFCs, you are able to categorise the larger and more important ones and monitor them closely. Supervision from the RBI has tightened much more for large NBFCs in the past decade or so. Hopefully this also provides the RBI greater confidence and greater visibility as regards how these NBFCs perform. That helps the RBI in liberalising the facilities it gives the NBFCs, so that they can diversify their liabilities more. If the RBI gives a direct line, a backstop like it gives to banks, to large, upper-layer NBFCs, it will create confidence in the market that these entities will not go belly up because there is RBI support.

 

Today, the banking licence is “on tap” but to business houses it is not. Upper-layer NBFCs are a very good substitute for that as long as a few other facilities are given to them. So, with this, the RBI can continue to limit bank licences.

 

What else should the RBI do for large NBFCs?

 

For institutions like us who work with 60-70 million customers, giving the credit-card licence is another area. Whatever security banks give, we can structure similar ones. So you are increasing the penetration of financial services. Additionally, now on Unified Payments Interface you can give credit. On RuPay the government and the RBI are trying to push that. So you could use some Indian-developed tools and products and use them as a way to expand those. A lot of this can be done through the sandbox environment the RBI creates. You can monitor them first, gain confidence and then open them up. So this opening up of the mind and being willing to experiment with controlled risk is important for us to really be able to open up the financial markets and be able to support the real economy.