Bajaj Finance: Strategies of a Lending Gian

Sector

Fintech

Background

Saurabh Mukherjea is the founder and CIO of Marcellus Investment Managers. We cover Bajaj's innovative lending model, how culture and technology give it a competitive edge, and the customer retention playbook that has helped compound its loan book at 40%.

Cover

Date

May 22, 2024

Episode Number

165

Background / Overview

History and Founding Story: Founded in 1987 as Bajaj Auto Finance, BFL originated as a financing arm for Bajaj Auto, India’s leading two-wheeler manufacturer. The inception stemmed from a partnership with Citibank in 1986 to finance two-wheeler purchases for factory workers in Pune, capitalizing on the lack of consumer financing options from government-owned banks. This beta test proved successful, leading to the formal establishment of Bajaj Auto Finance. The business evolved significantly post-2007 under the leadership of CEO Rajeev Jain, who transformed BFL into a retail lending powerhouse focusing on consumer durables, auto loans, and other retail credit products. The 2008 Lehman Brothers crisis, which saw BFL’s non-performing assets (NPAs) spike from 2% to 12% and return on equity (ROE) plummet to 1%, acted as a catalyst for reinvention, leading to the development of its signature zero-cost EMI (equal monthly installment) model.

Context and Scale: BFL operates as a deposit-taking NBFC, a rare designation that allows it to raise funds from public deposits, giving it a cost-of-funds advantage. Its $40 billion loan book represents approximately 20% of India’s $250 billion non-bank lending market and 1.5% of the country’s $2.3 trillion total credit outstanding. BFL’s dominance in consumer durable loans, accounting for nearly 60% of such loans in India, underscores its scale and reach. The company employs a workforce of young, driven professionals (average age under 30) and operates through 100,000 consumer durable stores, over 10,000 auto showrooms, and a mobile app with 52 million downloads.

Key Figures

• Rahul Bajaj (deceased): Founder of the Bajaj Group, a pivotal figure in Indian industry.
• Sanjiv Bajaj: Chairman of Bajaj Finserv (51% owner of BFL), providing strategic oversight.
• Rajeev Jain: CEO since 2007, instrumental in scaling BFL’s loan book and innovating the zero-cost EMI model.
• Nanoo Pamnani (deceased): Former Citibank executive and mentor who shaped BFL’s strategic direction post-2007.

Ownership / Fundraising / Valuation

Ownership Structure: Bajaj Finserv, the financial services arm of the Bajaj Group, owns 51% of BFL, with the Bajaj family maintaining significant influence. The family’s active involvement aligns with India’s tradition of family-run conglomerates, where capital allocation decisions are centralized. Public shareholders, including institutional investors, hold the remaining stake, reflecting BFL’s status as a publicly listed company on Indian stock exchanges.

Fundraising and Capital Raises: BFL has raised equity multiple times over the past decade, often at valuations of eight times price-to-book, providing low-cost equity capital to fuel growth. A notable equity raise occurred in 2009 post-Lehman to stabilize the balance sheet after a liquidity crunch. The company’s deposit-taking NBFC status and the Bajaj family’s reputation enable it to raise debt at 7.5–8%, only 100 basis points above the Indian 10-year bond yield (7%), a significant advantage over competitors.

Valuation: With a market cap exceeding $50 billion, BFL trades at a premium due to its high ROE (22%) and consistent growth. Its ability to raise equity at high valuations and reinvest at 22% ROE has driven a 32% book value per share CAGR over the past decade, contributing to a 1,000x share price increase over 16 years. Specific valuation multiples (e.g., P/E or EV/EBITDA) are not provided in the transcript, but the high price-to-book multiple suggests market confidence in BFL’s growth trajectory.

Key Products / Services / Value Proposition

BFL’s core value proposition lies in providing accessible, low-friction financing to aspirational middle- and upper-middle-class Indians who may not qualify for traditional bank loans or credit cards. Its flagship product, the zero-cost EMI loan, is a game-changer in consumer durable financing, enabling customers to purchase high-ticket items like refrigerators, TVs, or two-wheelers without upfront payments or interest costs.

Key Products and Value Proposition

Unique Aspects of the Value Proposition

• Zero-Cost EMI Model: BFL’s no-cost EMI product is a win-win for all parties. For a $1,200 fridge, BFL pays the manufacturer (e.g., Samsung) $1,140 (after a 5% marketing discount), collects $1,200 from the customer over 12 months via EMIs, and charges a small upfront fee. This yields a 20%+ IRR per loan, driven by the manufacturer’s discount and low operating costs due to automation.
• Customer Acquisition Engine: BFL embeds itself in the purchasing funnel through 100,000 consumer durable stores and 10,000 auto showrooms, capturing customers at the point of sale. Its app (52 million downloads) and Bajaj Mall further extend its reach, offering a seamless digital experience.
• Cross-Selling and Upselling: BFL leverages its initial low-ticket loans (e.g., for a fridge) to build customer relationships, upselling an average of six products per customer. Repeat customers have one-tenth the acquisition cost and one-third the credit risk of new customers, enhancing profitability.
• Data-Driven Underwriting: BFL’s proprietary data lake, with 200 billion data points across 200 million Indians, enables precise risk pricing and rapid loan approvals (90 seconds vs. competitors’ hours). This technological edge is reinforced by partnerships with Salesforce and a team of 1,000+ data scientists.

Segments and Revenue Model

Business Segments: BFL operates 40 distinct lending businesses, each run as a mini-company with its own financial metrics (net interest income, fee income, ROE, ROA). These are broadly categorized into:

1. Scale Builders: Low-risk, low-ROE businesses (e.g., home loans, new car finance, corporate loans) designed to build market share and loan book size.
2. Profit Maximizers: High-risk, high-ROE businesses (e.g., microfinance, two-wheeler loans, consumer durable loans) that drive profitability.

The company maintains a 50-50 balance between these segments to optimize growth and profitability while minimizing customer churn (e.g., balance transfers in low-ROE segments like home loans).

Revenue Model: BFL generates revenue through:

1. Net Interest Margin (NIM): 10% of the $40 billion loan book, equating to $4 billion annually. This is driven by lending at competitive rates (often zero-cost to customers) while borrowing at 7.5–8%.
2. Fee Income: 2% of the loan book ($800 million), primarily from upfront fees on zero-cost EMI loans.
3. Digital and Ancillary Services: Emerging revenue from Bajaj Mall (e-commerce) and Bajaj Pay (UPI payments), though currently a small contributor.

Revenue Drivers

• Volume: BFL’s loan book has grown at a 30% CAGR over 16 years, driven by India’s 11% credit growth, BFL’s 1.5% market share, and its ability to capture 60% of consumer durable loans. The doubling of the loan book every 2.5 years reflects strong volume growth.
• Pricing: BFL’s zero-cost EMI model relies on manufacturer discounts (5%) and small upfront fees, yielding high IRRs (20%+). In other segments, pricing is risk-adjusted (e.g., 22–23% for microfinance vs. competitive rates for home loans).
• Customer Mix: Targets aspirational middle- and upper-middle-class Indians, with 90% of consumer durable purchases in affluent areas financed via credit, 80% of which is BFL. Cross-selling to existing customers reduces acquisition costs and enhances revenue.
• Geo Mix: Stronger presence in wealthier western and southern India; weaker in lower-income eastern states.
• Channel Mix: 70–80% of revenue comes from in-store financing, with digital channels (app, Bajaj Mall) growing but not yet significant.
• End-Market Mix: Consumer durables dominate, followed by auto and home loans. Emerging segments include microfinance, corporate loans, and digital services.

Mix Shifts

• Historical: Shift from two-wheeler financing (1987–2007) to consumer durables and diversified lending post-2008.
• Forecasted: Digital lending (via app and Bajaj Mall) expected to grow as app downloads approach 100 million. New segments like corporate loans, gold loans, and tractor finance are planned to drive future growth.

Headline Financials

Summary Table

Revenue Trajectory

• Historical: Loan book grew at 30% CAGR from 2009–2022, outpacing India’s 11% credit growth. Revenue (NIM + fees) scales with the loan book, with NIM stable at 10% and fee income at 2%.
• Drivers: Volume growth (doubling every 2.5 years), high IRR on zero-cost EMI loans, and cross-selling to repeat customers. Emerging digital channels and new segments (e.g., corporate loans) are expected to sustain 25% loan growth over the next decade.

Cost Trajectory and Operating Leverage

• Cost Structure:
• Variable Costs: Provisions (1.5% of loan book, $600 million) and marginal collection costs (low due to automation).
• Fixed Costs: Operating expenses (OpEx) at 4% of loan book ($1.6 billion), covering salaries, data infrastructure, and physical presence. No marketing costs, as customer acquisition is embedded in the purchasing funnel.
• Operating Leverage: BFL’s lean operations (e.g., reducing loan agreements from 10 to 3 pages) and automation drive high operating leverage. Repeat customers (one-tenth acquisition cost) and low credit risk (one-third of new customers) enhance margins as the loan book scales.
• EBITDA Margin: Not explicitly stated, but PBT margin is 5.5% ($2.2 billion), reflecting strong cost control. PAT margin is 4.5% ($1.8 billion) after taxes.

Capital Intensity and Allocation

• Capital Intensity: Low, as BFL’s operations rely on data infrastructure and physical presence rather than heavy physical assets. Maintenance capex is minimal, with investments focused on technology (e.g., data lake, Salesforce partnership).
• Capital Allocation:
• Reinvestment: Capital is recycled into new loans, with a focus on blending scale builders (e.g., home loans) and profit maximizers (e.g., microfinance). The long-range planning (LRP) process sets five-year goals, often achieved in three years.
• Equity Raises: Raised at 8x price-to-book, providing cheap capital for reinvestment at 22% ROE.
• M&A: Limited; growth is organic, with new business lines (e.g., corporate loans) launched internally.
• Shareholder Returns: Not detailed, but high ROE and book value growth (32% CAGR) benefit shareholders.

Free Cash Flow (FCF)

• Drivers: High PAT ($1.8 billion), low capex, and efficient working capital management (automated collections, low NPAs at 1.5% provisioning).
• Cash Conversion: Likely strong due to low capital intensity and lean operations. No specific FCF figures provided, but the absence of heavy capex suggests FCF margins are close to PAT margins (4.5%).

Value Chain Position

Position in the Value Chain: BFL operates as a midstream player in the consumer lending value chain, bridging manufacturers/retailers (upstream) and consumers (downstream). It acts as an extension of manufacturers’ sales forces, financing purchases to drive sales volume while capturing high-margin lending revenue.

Primary Activities

• Inbound Logistics: Minimal; involves securing funds at 7.5–8% via deposits and debt markets.
• Operations: Loan origination (90-second approvals), underwriting (data-driven), and collections (automated).
• Outbound Logistics: Distribution through 100,000 stores, 10,000 showrooms, and digital channels (app, Bajaj Mall).
• Marketing and Sales: No traditional marketing; customer acquisition is embedded in the purchasing funnel.
• Service: Cross-selling and upselling via in-store agents and app, with repeat customers driving profitability.

Go-to-Market (GTM) Strategy: BFL’s GTM strategy is dual-pronged:

1. Physical Presence: Embeds lending desks in consumer durable stores and auto showrooms, capturing customers at the point of sale. In-store agents upsell larger-ticket items and cross-sell additional loans.
2. Digital Channels: Bajaj Mall and Bajaj Pay leverage cheap mobile data (40x cheaper than the U.S.) to offer e-commerce, payments, and lending. The app’s 52 million downloads reflect its growing role in customer acquisition.

Competitive Advantage in the Value Chain

• Low Cost of Funds: Borrowing at 100 bps above the sovereign yield (7%) enables competitive pricing.
• Data-Driven Underwriting: 200 billion data points allow precise risk pricing, reducing NPAs and provisioning costs.
• Scale and Reach: 200,000+ lending venues and 52 million app downloads create a plug-and-play ecosystem for manufacturers.

Customers and Suppliers

Customers

• Demographics: Aspirational middle- and upper-middle-class Indians, often ineligible for bank loans or credit cards. In affluent areas, 90% of consumer durable purchases use credit, with BFL capturing 80%.
• Retention: Low churn due to cross-selling (six products per customer) and competitive pricing in scale-building segments (e.g., home loans). Balance transfers occur (5–10% of the book), but new customer inflows exceed outflows.
• Purchasing Criteria: Convenience (90-second approvals), zero-cost financing, and access to credit for lifestyle upgrades.

Suppliers

• Manufacturers: Major consumer durable and auto manufacturers (e.g., Samsung, LG, Sony) provide 5% marketing discounts to BFL, enabling zero-cost EMI loans. BFL negotiates bulk discounts for Bajaj Mall, offering lower prices than Amazon or Flipkart.
• Funding Sources: Retail and wholesale debt markets, public deposits, and equity investors. The Bajaj family’s reputation ensures low-cost funding.
• Technology Partners: Salesforce provides analytics and CRM, maintaining a dedicated database for BFL’s 200 billion data points.

Contract Structure

• Loan Contracts: Short-term (e.g., 12-month EMI for consumer durables) with fixed fees; longer-term for home and auto loans. Automated collections minimize default risk.
• Manufacturer Agreements: Bulk discounts (e.g., 5% on consumer durables) are negotiated upfront, with immediate payment to manufacturers upon loan origination.

Market Overview and Competitive Landscape

Market Size and Growth

• Total Credit Market: $2.3 trillion (banks: $2 trillion, NBFCs: $250 billion), growing at 11% annually.
• Consumer Durable Loans: BFL dominates with a 60% share, reflecting its focus on a high-growth niche.
• Growth Drivers: India’s 12% GDP growth, rising middle-class consumption, and increasing credit penetration (15% credit growth projected over the next decade).
• Emerging Niches: Gold loans ($1 trillion market), tractor finance (60% rural population), and corporate loans (reviving post-2016 NPA issues).

Market Structure

• Fragmented but Consolidating: The NBFC sector is fragmented, but BFL’s 20% share of non-bank lending and 1.5% of total credit reflect its leadership. Banks dominate corporate lending, but BFL’s low cost of funds positions it to compete.
• Minimum Efficient Scale (MES): BFL’s $40 billion loan book and 200 billion data points create a high MES, deterring new entrants without significant capital and data infrastructure.
• Industry Traits: Regulatory oversight by the Reserve Bank of India (RBI) focuses on consumer fairness, with recent scrutiny impacting BFL’s EPS growth (21% vs. potential 25%).

Competitive Positioning

• Matrix Positioning: BFL targets aspirational consumers with low-friction, high-speed financing, differentiating on speed (90-second approvals) and accessibility (zero-cost EMI).
• Market Share: 1.5% of total credit, 20% of NBFC lending, and 60% of consumer durable loans. Growth exceeds market rates (30% vs. 11% credit growth).
• Risk of Disintermediation: Low, as BFL’s data lake, physical reach, and manufacturer partnerships create a defensible moat. Banks lack the agility to replicate BFL’s model.

Porter’s Five Forces and Hamilton’s 7 Powers Analysis

1. Threat of New Entrants (Low)
• Barriers to Entry: High MES due to BFL’s scale ($40 billion loan book), data infrastructure (200 billion data points), and physical reach (200,000 venues).
• 7 Powers:
• Economies of Scale: Low OpEx (4%) and provisioning (1.5%) due to automation and repeat customers.
• Switching Costs: Customers face credit score penalties for defaulting, ensuring repayment and enabling cross-selling.
• Cornered Resource: Proprietary data lake and Salesforce partnership are unique assets.
• Process Power: Automated underwriting and 90-second approvals outpace competitors.
2. Threat of Substitutes (Moderate)
• Bank loans and credit cards are substitutes but less accessible to BFL’s target customers. Zero-cost EMI reduces price-based competition.
• 7 Powers:
• Branding: Bajaj family’s reputation ensures low-cost funding and customer trust.
• Counter-Positioning: Zero-cost EMI model is difficult for banks to replicate profitably.
3. Supplier Power (Low)
• Manufacturers (e.g., Samsung) rely on BFL to drive sales volume, granting discounts. Funding sources are diversified (deposits, debt markets).
4. Buyer Power (Low)
• Customers have limited bargaining power due to BFL’s dominance in consumer durable financing and rapid approvals.
5. Industry Rivalry (Moderate)
• Competitors include banks and other NBFCs, but BFL’s data-driven underwriting and physical reach create a competitive edge. High fixed costs in lending drive price competition, but BFL’s low cost of funds mitigates this.

Strategic Logic

• Capex Cycle Bets: BFL’s investments in technology (data lake, app) and physical presence are offensive, positioning it for digital lending growth.
• Economies of Scale: Achieved MES with $40 billion loan book; further scale avoids diseconomies due to decentralized decision-making.
• Vertical Integration: Controls underwriting, distribution, and collections, enhancing efficiency.
• Horizontal Expansion: New segments (e.g., corporate loans, gold loans) leverage existing infrastructure.

Risks and Opportunities

Risks

1. Regulatory Scrutiny: The RBI’s focus on consumer fairness led to a temporary suspension of digital products six months ago, reducing EPS growth by 300–400 bps. Rapid growth attracts regulatory attention.
2. Succession Risk: CEO Rajeev Jain’s potential transition to a non-executive role in 3–5 years poses a risk, despite a capable successor.
3. Political Sensitivity: Expansion into gold loans and tractor finance targets lower-income segments, risking loan waivers by politicians.

Opportunities

1. Market Share Growth: Targeting 2% of India’s $2.3 trillion credit market from 1.5%, driven by 25% loan growth over the next decade.
2. Digital Transformation: 52 million app downloads and 25 million Bajaj Pay users position BFL as a fintech leader, with potential for 100 million downloads.
3. New Niches: Gold loans, tractor finance, and corporate loans offer untapped growth, leveraging BFL’s low cost of funds and underwriting expertise.

Key Takeaways and Lessons

1. Innovative Revenue Model: The zero-cost EMI model, driven by manufacturer discounts and automation, delivers high IRRs (20%+) while aligning incentives across customers, retailers, and manufacturers.
2. Data as a Moat: BFL’s 200 billion data points and automated underwriting create a defensible competitive advantage, enabling rapid approvals and low NPAs.
3. Operating Leverage: Low acquisition costs, no marketing spend, and repeat customer economics drive high margins as the loan book scales.
4. Balanced Portfolio: Blending scale builders (low ROE) and profit maximizers (high ROE) sustains growth and profitability while minimizing churn.
5. Cultural Discipline: A 65-hour workweek, metricized incentives, and long-range planning foster a high-performance culture, with 15% attrition despite intense demands.
6. Capital Allocation Excellence: Raising equity at 8x price-to-book and reinvesting at 22% ROE drives a virtuous cycle of compounding, achieving 32% book value CAGR.
7. Focus and Excellence: Sanjiv Bajaj’s emphasis on disruptive innovation, scale with excellence, and long-term profitability ensures strategic clarity, avoiding conglomerate sprawl.

BFL’s success lies in its ability to marry technology, scale, and cultural discipline to serve India’s aspirational consumers, positioning it for continued growth in a dynamic and expanding market.

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