The Reserve Bank of India's latest order prohibiting Bajaj Finance from sanctioning and disbursing loans under its 'eCOM' and 'Insta EMI Card' products may not have serious implications on the non-banking finance company's profitability, provided the ban is lifted within six to eight weeks, analysts said.
"In a surprise move, the RBI has asked Bajaj Finance to stop sanction and disbursal under two of its digital lending products.
"While the move is negative, the speed of correction will be key to reinstate products," global brokerage Jefferies said in a report.
Recently, the Reserve Bank of India directed the NBFC not to sanction and disburse loans under its two products — Insta EMI and eCOM — with immediate effect.
The direction cites violations of certain provisions of the digital lending guidelines including the non-issuance of key fact statements (KFS) to borrowers for these two lending products, and deficiencies in KFS issued for other digital loans sanctioned by the company.
These supervisory restrictions, Bajaj Finance said, will remain in place till the deficiencies observed are made good by the company to the satisfaction of the RBI.
Following the development, shares of BAF tumbled 4 per cent in the intraday trade, before recouping losses to end 1.9 per cent higher at Rs 7,366 per share.
By comparison, the benchmark S&P BSE Sensex settled 0.47 per cent higher.
"Based on the concerns raised by the RBI, the company will undertake a detailed review of the KFS, and implement requisite corrective actions to the satisfaction of the RBI at the soonest," BAF said in a statement.
Going ahead, analysts expect Insta EMI Card acquisitions/issuances to decelerate over the next 45-90 days.
Assessing the impact
At present, BAF's Insta EMI card segment contributes nearly 5.5 per cent of BAF's total customer franchise.
As per CLSA's initial expectations, Bajaj Finance issues nearly 700,000 digital EMI cards quarterly.
"The one-time processing fee is Rs 600. This implies a revenue hit of Rs 42 crore per quarter.
"In addition, 30 per cent of the digital EMI cardholders avail a loan within three months – as per our maths, thus the foregone revenue from those loans is another Rs 23 crore.
"In all, the Insta EMI Card ban would hit revenues by Rs 65 crore per quarter – ie 1.5 per cent of profit before tax," it said.
platforms and 110,000-120,000 monthly B2B loans originated through the Insta EMI Card, analysts anticipate BAF to compromise on loan volumes of 450,000 (over 45 days) to 900,000 (over 90 days).
"We assume the eCOM ban to be a ban on Bajaj Mall loans as well as other digital loans given on ecommerce sites.
"The former is around 700,000 per quarter while the latter is unknown.
"Assuming both add to 1 million loans per quarter, this would amount to 20-25 per cent of consumer durable (CD) loans disbursed.
"CD loans comprise c.10 per cent of total loans and c.15 per cent of total profit.
"If 20-25 per cent of the incremental CD loans are impacted by the ban, it would hit profits by 4-5 per cent," said CLSA.
That said, analysts remain hopeful due to the fact that deficiencies identified by the RBI are more operational in nature, and do not raise any questions on BAF's processes or the structures of the various products in these two sourcing channels.
Besides, the ban has come after the festive period, which is relatively lull, and where BAF may generate monthly e-commerce loan volumes of 220,000-230,000 as against festive period volume of 350,000-400,000.
Analysts at Morgan Stanley expect the issue to be resolved soon, thus mitigating any impact on earnings per share.
"Though we acknowledge that there will be an impact on both AUM growth as well as fee income in H2FY24, our long-term thesis for this franchise remains intact.
"Any significant correction in the stock price purely because of this event should be used as an opportunity to accumulate," said Motilal Oswal Financial Services.
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