Sanjiv Bajaj wants to make a mark in consumer finance. The market may be tough but he has his plan ready.
Ask Sanjiv Bajaj who is his biggest rival in financing the purchase of consumer durables and he is unlikely to name a bank or a non-banking financing company. It is, says he, the credit card. So, Bajaj, the managing director of Bajaj FinServ, has come up with an equally convenient option but one that is far cheaper. His company offers loans at zero interest compared to the 20 per cent plus that a credit card loan costs, and also provides the loan in five minutes flat. Of course, the company is compensated by the manufacturer who picks the tab.
The move, Bajaj claims, has begun to pay off: A fair share of credit card users — estimated at 40 per cent of all buyers of consumer durables — have opted for a loan from Bajaj Finance, the consumer finance arm of Bajaj FinServ. It financed every third television set that was bought on installments during the recent festival season. That has taken the company’s share in consumer durables to around 14 per cent in the 50-odd cities where it operates.
Bajaj FinServ is the financial services business that was carved out of Bajaj Auto. It began life with two insurance (life as well as general) ventures with Allianz of Germany and Bajaj Auto Finance. It was now the domain of Bajaj. He was of the view that consumer finance needed to grow beyond just two-wheelers. He saw a larger opportunity across lending, investments, insurance and advisory. “The plan is to become the financial partner to the Indian consumer across his major needs,” says he. Thus, Bajaj Auto Finance became Bajaj Finance. From a financier of Bajaj two- and three-wheelers, in the last two years it has diversified into all categories of automobile loans, consumer loans, small business loans and mortgages — loans against property and shares. Next on the drawing board is Bajaj Financial Solutions, a financial products distribution and advisory company, which will be launched some time next year. And at some point in the future, should the regulator allow it, Bajaj says he could explore a banking licence.
At the moment, the focus is on consumer finance. Going by the numbers, it is reasonable to assume that Bajaj Finance has built a huge distribution network. On the contrary, Bajaj says, it has scaled back — from a presence in nearly 200 cities, it now operates in just 54. Instead, it has tied up with big consumer electronics retail chains in the country like Croma, Ezone and Vivek’s. “We have positioned our credit officers in as many of these retail stores as possible. As a result, we now have nearly 2,000 touch points,” says Bajaj Finance CEO Rajiv Jain.
Analysts say this is smart. The market for consumer electronics is buoyant.
Prospective buyers are on the lookout for finance but there is a gap as banks have vacated the space because of the huge defaults in the last two years. “When was the last time you saw an SBI (government-owned State Bank of India, the country’s largest lender) manager at a Croma outlet?” asks KPMG Executive Director Ravi Trivedy.
That does not mean Bajaj Finance does not want to grow its network at all. From 54 cities, it plans to grow to around 70 by the middle of next year. Almost 80 per cent of the distribution network will be outside the metros. In addition to direct selling agents, it has 600 proprietary offices to disburse loans. Bajaj Finance wants to leverage this network to lend to small businessmen as well. Shriram Capital Managing Director G Sundararajan, who was earlier the head of Fullerton India, cautions that it is not an easy business. “Small businesses can be wiped out in a downturn because their margins are wafer-thin; if they are forced to hold on to inventories for even seven days more than necessary, their margins are gone.” The trick, he says, is to do what is called “neighbourhood financing”. In other words, restrict the catchment of a branch to a radius of three or four km so that it’s easy to stay in touch with the customer. Bajaj Finance, on its part, has decided not to lend to high-risk customers like personal computer assemblers or jewelry exporters. Instead, it wants to focus on the purchase of construction equipment, where loan sizes would be in the range of Rs 10 lakh to Rs 30 lakh.
In the past, lenders have piled up losses even with asset-backed loans because they mispriced assets in the quest for market share. Bajaj Finance is all too aware of the pitfalls, especially because it took a hit in the two-wheeler segment. Though delinquencies in the consumer loans business today may be less than 3 per cent, it wasn’t always so. Jain concedes that between 2005 and 2007, bad debts went up sharply and the company is still paying for those mistakes. But it’s learning from the mistakes. Much like what Bajaj Allianz did during its rollout, it has manned the outlets with locals so that the borrower or lender is not an unfamiliar face.
Bajaj Finance knows that it needs to be choosy about its customers. Bajaj recalls that three years ago the company may have been lending to customers who didn’t necessarily have the right risk profile. Today, it’s looking at wealthier borrowers who, it believes, have the ability to weather a downturn. “We don’t mind lending more to customers who have the capacity to pay; we’re looking for premium customers. In fact, our average ticket size for durables was Rs 13,000 two years back; today it’s gone up to Rs 23,000, though prices have actually fallen,” says Jain. That’s probably the way to go because, as The Boston Consulting Group Partner and Director Saurabh Tripathi says, consumer durables is not a very profitable proposition if the ticket size is too small because it’s hard to collect debts.
Bajaj Finance wants to pursue the same strategy for other products too. “The average ticket size for our loans to small businesses is Rs 16 to 17 lakh, compared with the industry average of Rs 8 to 10 lakh,” says Jain. Of course, even bigger customers come with their share of risk. To combat this, the company has created a risk management team for each product. Apart from technology, it also makes full use of the database of Credit Information Bureau (India) Ltd — Bajaj Finance is probably one of the biggest users of the database. It also has its own database of 4.5 million customers and a team with some experience of how differently customers behave in different parts of the country.
Targeting premium customers
Bajaj Finance also knows that to be able to attract premium customers, it needs to offer them a different value proposition as compared to its rivals. Since the company borrows from banks, it can’t always match their price. Jain admits that Bajaj Finance’s loans are 25 to 50 basis points more expensive than banks. But the company has devised ways to get around it. For instance, if a borrower has paid 12 installments on time, 0.1 per cent of the fee is refunded. Borrowers can pre-pay loans without a penalty.
Where Bajaj Finance hopes to make the real difference is in service: It wants to disburse loans faster than its peers, allow customers to pre-pay loans from their desktops and return documents on loans against property in less than five days — an industry record. Of course, customers have round-the-clock access to its call centres.
The plan seems to be working. “The company is now stimulating demand for 8 to 10 per cent of LCD televisions sold in the country every month, a reflection of the strategy to pursue affluent customers,” says Jain. The loan book grew to Rs 3,500 crore at the end of September 2009 from Rs 2,500 crore a year ago. While it’s hard to look too far ahead, Jain is hoping to grow the book by 30 to 40 per cent over the next 18 to 24 months. Though provisions might depress profits in the current year, the business should become more profitable from next year onwards as costs come off their peak and spreads improve in a better macroeconomic environment.
Bajaj believes unsecured loans can fetch rates of 22 to 24 per cent, while loans against property can bring in 13 to 14 per cent. So given the cost of funds at 8.5 to 9 per cent, the spreads could be as high as 1,000 basis points for some products. What will also help boost the bottom line is the distribution of products such as insurance. Sundararajan says that while it’s not easy to cross-sell products, it’s important to do so because fee income can support the margins. He believes that it’s possible to earn as much as 50 per cent of revenues from fees. BCG’s Tripathi believes there is good money to be made in loans against property because that is a huge market, though it’s not a cakewalk because banks are big players in this space.
Bajaj FinServ’s track record with insurance, both life and general, has been good; although the company’s market share among private life insurers has slipped to around 13 per cent from over 20 per cent, it is one of the few players that are profitable and use capital efficiently. Bajaj says he’s hoping to leverage the relationship with Allianz of Germany — which manages about $1 trillion of mutual fund assets and has pitched for a licence to run an asset management company in the country — to tap the same customer base in Tier II and III cities for savings and investments products.
The ultimate ambition of Bajaj is to start a bank. It makes sense because, as KPMG’s Trivedy points out, it gives access to low-cost deposits at 3.5 per cent and a broader asset portfolio comprising working capital, trade finance and infrastructure funding. But that’s in the distant future. Bajaj though is in no hurry; slow and steady is the way he wants it.