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INTERVIEW

Bajaj Finserv says liquidity issues gave top NBFCs edge

Cogencis, Thursday, Mar 7

By Bhakti Tambe and T. Bijoy Idicheriah

MUMBAI – The liquidity squeeze in money markets after multiple defaults on debt repayments by Infrastructure Leasing & Financial Services group has widened the gap between top-rung non-bank finance companies and others, according to Bajaj Finserv Ltd Chief Financial Officer S. Sreenivasan.

"I think, now the gap between top-rung companies and others has widened. So, people like us or HDFC (Housing Development Finance Corp Ltd), we have no issue in finding the money," Sreenivasan told Cogencis in an interview.  

The default by IL&FS was a credit event, which eventually turned into an issue of liquidity, as market participants were wary of lending to non-bank finance companies and mortgage lenders, Sreenivasan said.

Bajaj Finance's assets under management were up 41% on year at the end of December, even as other non-bank finance companies saw a sharp drop in growth in assets, as they sold portfolios to generate liquidity.

The liquidity issues will have no bearing on business prospects for Bajaj Finserv's subsidiaries such as Bajaj Finance Ltd, Bajaj Allianz Life Insurance Co Ltd, and Bajaj Allianz General Insurance Co Ltd during the March quarter, he said.

Bajaj Finserv is the non-operating financial holding company of the Rahul Bajaj group, and promotes Bajaj Finance and the two insurance companies. Each of these businesses had to make provisions against their exposures to IL&FS group entities, with Bajaj Finance providing a total of 450 mln rupees in Jul-Dec, against its 2.25-bln-rupee exposures to two operational buildings in GIFT City.

Sreenivasan said that though the exposure was secured, Bajaj Finance chose to provide for the exposure as a conservative measure, as recoveries are likely to be delayed due to the legal moratorium on payments.

Even though the Insurance and Regulatory Development Authority of India has not specified the level of provision for IL&FS accounts, as the exposures were to unsecured commercial papers, both insurance arms provided 75% provision as on Dec 31, Sreenivasan said.

"We think this is fair as of now based on the information that we have, because our call is that it may take time. But eventually, you know, there will be a haircut. But people will get back some money," he said.

In Jul-Sep, both the insurance companies in the group also factored in the impact on their books from a rise in claims due to the floods in Kerala.

GENERAL INSURANCE

Sreenivasan said Bajaj Allianz General Insurance would be cautious on the group health business in 2019-20, after seeing a rise in claims on this front in the current financial year.

"This year, we had some extra claims on group (insurance). We thought the pricing was good early on last year–last quarter of last year–but claim experience has not been that great. So, that is something we will moderate as we go forward. We are a bit cautious. Will go cautious next year," he said.

He said the profit for the insurance companies in 2018-19 would be lower on year due to challenges on the investment front and higher claims due to events such as the floods in Kerala.

Bajaj Allianz General Insurance reported a net profit of 6.9 bln rupees for Apr-Dec, down 5% on year, while Bajaj Allianz Life Insurance reported a net profit of 3.9 bln rupees, down 28%.

"The non-life is already at around 700 odd crore (7 bln rupees) profits and it is doing well. So, we will have good profit at the end of the year. But it will be a bit less than last year for the life company, definitely because of the IL&FS hit. Non-life also had the Kerala floods," he said.

Amid all this, it is tough for insurers to select investments that would yield returns, while not running foul of regulatory norms, he said.

Bajaj Allianz General Insurance will generate 30 bln rupees of "new float" this financial year, which will automatically lead to assets under management growing by the same amount, he said, adding that another 30-40 bln rupees of maturity of past investments will also come through, which will be reinvested at higher yields.

"By and large, we get to reinvest them at a higher yield because corporate bond yields have widened. As long as we do our credit appraisals properly, stick to really good names, you know, the yields should be better in FY20 than FY19," he said.

According to Sreenivasan, motor insurance, health insurance, and small-ticket health insurance have been the drivers of the general insurance business. Growth in corporate products has been muted, he said.

Bajaj Allianz General has consciously gone slow on the crop insurance business in the current financial year, as it isn't comfortable with the pricing, he said.

LIFE INSURANCE

For Bajaj Allianz Life Insurance, the group insurance business grew 30% on year by focusing on group protection business.

Sreenivasan said the focus was on improving persistency levels, with an aim to take the 61st month persistency ratio to 50% in three years from the current 36%. About four-five years ago, the number was at only 8-9%.

"Our target is to take it up to over 50% in the next three years, which is in line with what the good companies are doing. Hopefully, we will end the year close to 80%

13-month persistency or better. So, overall the quality parameters in life are all looking good," he said.

The life insurance business, he said, has seen a "turnaround". Bajaj Allianz Life Insurance, which has entered into bancassurance partnerships with Dena Bank, India Post Payments Bank, and small finance banks, will pitch for similar relationships with other banks, especially state-owned ones, Sreenivasan said.

The life insurance company's focus on improving its share in traditional businesses enabled it to avoid a hit on account of people holding back on unit-linked insurance plans, which have hurt growth for other insurers.

"ULIP-heavy companies will have a higher hit this quarter. I think generally, things have slowed down in the market. The plus point is we, last year, decided to go more into traditional. We reduced our exposure to ULIP," he said.

This shift in strategy enabled the life insurer to increase its share of traditional life policies to 39% at the end of December from 28% a year ago. As this segment is more long-term and guaranteed, it is less exposed to market movements, he said. The target is to reduce the share of the ULIP business to 55-60% from 61% as on Dec 31 and focus on improving the ticket size for traditional policies.

"The good thing in the life business is that we are hoping to end the year with positive new business margin, after covering our over-runs. Last four-five years, we have not been able to achieve that. The over-runs were higher than the margins. But that is crossed now."

At 1515 IST, shares of Bajaj Finserv were marginally down at 6,600 rupees, while those of Bajaj Finance were down 1.3% at 2,729.75 rupees on the National Stock Exchange.  End

Edited by Avishek Dutta

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