Lower growth guidance and MSME loan stress weigh on Bajaj Finance

Bajaj Finance reported a robust Q2FY26 earnings, but it is facing stress in consumer loans and micro, small and medium enterprises (MSME), and credit costs are elevated. Rising consumption demand and falling funding costs are positive factors. Valuations are on the high side and high leverage may become a concern.

 

MSME loans are at 12 per cent of assets under management (AUM) and 42 per cent of loan book is exposed to consumption (including both B2B and B2C) loans across both rural and urban geographies. Another 31 per cent is in mortgages.

 

Stress in consumer loans may be reducing as collections are improving in the rural B2C segment. The company has tightened up sanctions and is cautiously optimistic as it rides the demand arising from the GST cuts. Bajaj indicated it has faced stress in unsecured MSME loans since Q1FY26 itself and until restructuring takes hold, MSME loan growth will be slow.

 

Loan growth guidance is downgraded to 22-23 per cent from an earlier 24-25 per cent, reflecting slowdown in MSME and mortgages. Improving productivity initiatives and marginally improving credit costs may sustain earnings growth, offsetting lower fee incomes and lower net interest income or NII.

 

Bajaj Finance has pushed AI initiatives in over hundred high-impact areas, but while this will improve scale, velocity and lower operating expenses, it is hard to quantify impact at this stage. As the addressable market increases, there could be faster growth over the medium and long-term.    

 

The AUM grew at 24 per cent year-on-year (Y-o-Y) to ₹4.6 trillion. Festive season spend was up 29 per cent Y-o-Y, but the company lowered its overall growth guidance to 22-23 per cent in FY26 due to cutbacks in the MSME portfolio. Bajaj Finance has cut 25 per cent of unsecured MSME volumes and expects lower growth of 10-12 per cent for the MSME portfolio. It has also cut exposure to captive 2-wheeler and 3-wheeler finance (contributing 2 per cent of AUM).

 

The company is witnessing a strong traction in new verticals (cars, gold, MFI) and new customer additions. The FY26 net interest margin or NIM will be supported by lower cost of borrowing. Credit cost remained above 2 per cent due to stress in captive auto finance and MSME.

 

In Q2FY26, AUM grew 24 per cent Y-o-Y and 5 per cent Q-o-Q to ₹4.6 trillion, with mortgages up 25 per cent Y-o-Y, sales finance up 23 per cent, consumer B2C up 25 per cent  and commercial lending up 27 per cent. New loans booked in Q2FY26 were up 26 per cent Y-o-Y to 12.2 million and the company added 4.1 million new customers, taking the total number of customers to 110.6 million. Guidance is for adding 17 million new customers in FY26. A partnership with Bharti Airtel and strong customer addition will aid growth to offset lower disbursements in MSME. In FY27 and beyond, AUM growth could recover to 24 per cent plus.

 

The NII grew 22 per cent Y-o-Y (5 per cent Q-o-Q) and NIM as calculated remained stable Q-o-Q at 9.5 per cent. Cost of funds improved by 27 basis points Q-o-Q to 7.52 per cent and guidance is for between 7.55 per cent and 7.60 per cent in FY26. The cost/income ratio stood at 32.6 per cent (up 8 basis points Q-o-Q) and likely to improve in H2FY26 and FY27 as AI driven efficiency kicks in. The return on assets and return on equity (RoA/RoE) should rise to around 4.4 per cent and 21 per cent respectively by FY28.

 

But high credit costs and stress in auto and MSME led to gross non-performing assets (GNPA) rising to 1.24 per cent and net NPA deteriorated to 0.6 per cent vs 1.03 per cent and 0.50 per cent, respectively in Q1FY26 and the provision coverage ratio or PCR stood at 52 per cent. Company guides for credit costs to improve to 1.85-1.95 per cent for FY26. Post FY26E, further moderation to 1.8 per cent is likely.

 

AUM growth is pretty good despite the MSME slowdown. Efficiency gains may sustain during FY26-FY28. New products contributed 6.3 per cent of AUM, which may offset headwinds in MSME. The company remains a market leader. The stock market response to the results was negative.