Management Discussion and Analysis Financial year 2015-16 (FY2016) began on a positive note. Despite a gloomy global scenario — both across developed economies and key emerging ones such as China — India had closed FY2015 with growth in real GDP of 7.2% and a growth in gross value added (GVA) of 7.1%. Low crude oil prices, comfortable inflation levels, some reduction of policy rates by the Reserve Bank of India (RBI), a reasonable current account deficit and the promise of reforms by the Central Government under Prime Minister Narendra Modi suggested even faster economic growth in FY2016. In all fairness, that has happened, notwithstanding disastrous monsoons for the second successive year, low agricultural growth, poor income generation across much of rural India and relatively lukewarm growth in infrastructure activities. As Table 1 shows, growth is picking up. Inflation levels remained comfortable during the year. The consumer price index inflation ranged from 3.7%o to 5.7% while that of the wholesale price was (-)0.85% during the year. With lower A inflation, the RBI cut policy rates by a 100 basis points (bps) in three tranches: a 25 bps reduction in June 2015, followed by another 50 bps in October 2015 and another 25 bps in April 2016. To ease liquidity, the RBI also announced in September 2015 an intent to reduce the Statutory Liquidity Ratio (SLR) in four equal phases by 100 bps by January 2017. The first such reduction of 25 bps was made in its monetary policy announced in April 2016. Banks have passed on a part of the benefits of eased liquidity and rate cuts, but not enough given the difficult state of their books thanks to the burden of significant non-performing assets (NPAs). This encumbrance has also put a damper on the growth in bank credit, which grew at 11.3% in FY2016 versus 9.5% in the brvious year — not the kind of uptick that one associates with a GDP growth of 7.6%. Growth in bank deposits too has been muted: rising at 9.9% in FY2016, which was 150 bps less than what had occurred in the brvious year. This relatively lower deposit growth has not given sufficient avenues to the banks to improve their net interest margins, which was essential for the industry to cover the huge surge in NPAs. Indeed, the four key issues in the banking sector are: (i) Will the banks have sufficient strength to correctly account for their NPAs and take the additional hits that they need toRs. (ii) What will that do to their lending appetite as India tries to grow at 8% per annumRs. (iii) Can there be a sensible way in which some of the NPAs be taken off the books and be located in asset reconstruction companies (ARCs) who must have the freedom to expeditiously re-sell or dispose such assets in parts or in the wholeRs. And (iv) Is there a sensible way for the exchequer to recapitalise the public sector banks bereft of moral hazard, so that they can shore up their capital base and refocus on the core business of collecting deposits and lendingRs. Regarding the last issue, while the Union Budget for 2016-17 has allocated H 25,000 crore for bank recapitalisation, it is clearly not enough. There are no doubts about the 'green shoots' across the economy. How FY2017 plays out depends upon the monsoons which are currently brdicted to be normal, the extent of growth in infrastructure spends, a positive swing in entrebrneurial animal spirits leading to an increase in the number of projects, capital investments and the ability of the financial sector to finance growth. We at Bajaj Finance Limited are hopeful that FY2017 will see higher growth and a start of an investment cycle. Non-Banking Finance Companies (NBFCs) continue to grow their share in financial services industry. India Ratings expects NBFCs to account for over 17% of the total credit in the country by FY2019, compared to 13.1% at the end of the FY2015 and 9.4% in the FY2006. Until some years ago, NBFCs were a small part of the financial services business with a small resource base. Today, the equity of leading NBFCs is comparable with or larger than many mid-sized banks. The combined market capitalisation of the top 10 NBFCs is now twice that of mid and small-sized public sector banks. The Union Budget for 2016-17 has proposed to introduce deduction of the provision for NPAs by NBFCs under the Income Tax Act — hitherto available only to banks. This, coupled with the recommendation in the Union Budget of 2015-16 that NBFCs registered with the RBI with asset size of Rs. 500 crore or more be considered as 'financial institutions' in terms of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, now creates a level playing field with the banks. The Company Bajaj Finance Limited ('Bajaj Finance', 'BFL' or 'the Company') had a strong year aided by a diversified product mix, robust volume growth, prudent operating cost management and an effective risk management. With assets under management of Rs. 44,229 crore, BFL has emerged as one of the leading diversified NBFCs in the country today. It delivered strong results in FY2016, the highlights of which are given below. Bajaj Finance Limited: Performance Highlights, FY2016 • Assets under management: up 36% to Rs. 44,229 crore. • Receivables under financing: up 37% to Rs. 42,756 crore. • Total income: up 36% to Rs. 7,384 crore. • Total operating cost: up by 36% to Rs. 1,949 crore. • Loan losses and provisions: Rs. 543 crore. • Profit before tax: up 45% to Rs. 1,965 crore. • Profit after tax: up 42% to Rs. 1,279 crore. • Capital adequacy as on 31 March 2016 was 19.50%, which is well above the RBI norms. BFL focuses on six broad categories: (i) Consumer Lending, (ii) SME Lending, (iii) Commercial Lending, (iv) Rural Lending, (v) Fixed deposits; and (vi) Value added services. The Company's product suites are given below. Verticals Product Consumer Lending Two-Wheelers and Three-Wheelers Finance Consumer Durables Finance Digital Products Finance Lifestyle Products Finance Retailer Finance Personal Loans Cross-Sell Salaried Personal Loans E-Commerce Consumer Finance E-Commerce Seller Finance Home Loan - Salaried EMI Card - Retail Finance SME Lending Loan Against Property Lease Rental Discounting Business Loans Professional Loans Home Loans - Self Employed Developer Financing Commercial Lending Auto Component Manufacturer Financing Loan Against Securities Financial Institutions Group Lending Business Light Engineering Business Corporate Finance Business Rural Lending Consumer Durables Finance Digital Products Finance Personal Loans Cross-Sell Salaried Personal Loans Gold Loans Refinance Loans Business Loans Professional Loans Loan Against Property Fixed Deposits Retail Fixed Deposits Wholesale Fixed Deposits Value Added Services Life Insurance Distribution General Insurance Distribution Mutual Fund Distribution Credit Rating Distribution Property Fitness Reports Distribution Financial Fitness Report Distribution Insurance Risk Report Distribution Property Search Services To fuel its medium term growth plans, the Company raised capital by issue of shares to Qualified Institutional Buyers (QIBs) amounting to about Rs.1,400 crore. Simultaneously, a brferential allotment of convertible warrants was made to Bajaj Finserv Limited ('Bajaj Finserv'), the holding company, amounting to approximately Rs.400 crore. In accordance with the terms of issue, 25% of issue price amounting to Rs.102.03 crore was received on application. Accordingly, the revised shareholding of Bajaj Finserv in BFL stood at 57.28% as against 61.53% as at the end of the reporting year. BFL capital adequacy stood at a healthy 19.50%. Tier I capital adequacy was 16.06%. BFL's loan book continued to remain strong due to the care that it takes in its loan portfolio and choice of borrowers as well as its robust risk management. Its net NPA at 0.28% is among the lowest in the banking and the NBFC industry. This was despite portfolio quality brssures on account of the sharp slowdown in infrastructure activities, which affected two of its products, namely Construction Equipment Finance and Infrastructure Finance. There was also a marginal deterioration in portfolio quality of the Mortgage businesses owing to the stressed real estate market, low credit growth coupled with elevated competition in the segment. Prudent asset liability management (ALM) and a judicious mix of borrowings between banks, money markets and fixed deposits have helped BFL drop its cost of borrowings by around 50 bps in FY2016. As of 31 March 2016, BFL's total borrowings stood at Rs. 37,025 crore. Business Update Consumer Lending BFL was the largest financier of Bajaj motorcycles and three-wheelers in FY2016. The Company operates at the brmises of approximately 3,500 Bajaj dealers and sub-dealers across the country. Its unique Direct Cash Collection (DCC) model in rural and semi-urban markets enabled customers with no banking habits to repay their EMIs in cash. This product offering serves the cause of much needed financial inclusion in the country. BFL continued to be one of the largest consumer durables lenders in India. With a brsence in 192 cities across India and approximately 9,200 dealer counters across the country, it deployed Rs.12,972 crore in FY2016 — registering a growth of 29% over the brvious year. Its unique Existing Member Identification (EMI) card, with a base of over 5.6 million, enables customers to avail instant credit after the first purchase. Consumer durable financing through EMI cards grew by 67% over FY2015. Wide geographic brsence coupled with extensive EMI card base provides BFL with an inherent growth platform. BFL has expanded its EMI card proposition with offerings in retail fashion, travel and small appliances. Customers can now avail easy EMI financing on purchasing apparels, eyewear, accessories, small appliances and travel related expenditures. The EMI financing option is applicable on the total invoice value and can be split across several products across different categories. The facility is now available to customers on a minimum invoice amount of Rs. 5,000. The Company launched a first of its kind consumer durable mobile app for its customers in FY2016. This app provides the customer ease and convenience of 'anytime anywhere' loan approval with minimal data entry and is available across all mobile platforms. BFL has over the years expanded its consumer durable financing to digital products and lifestyle products. It has tied up with leading manufacturers like Apple, Sony, Samsung, Dell, OPPO, Vivo among others for its digital products financing. It operates lifestyle products financing (for furniture, home furnishings, etc.) and digital product financing nation-wide in approximately 6,400 dealer counters. The combined growth in deployment of digital and lifestyle financing in FY2016 was 99%. The digital products financing business launched a partnership model called 'Digital Activate' by combining strengths of the retailer and BFL. In this model BFL brings the strength of its technology and franchise while the retailers commit the last mile delivery to create a distinct business model to grow volumes. As a part of this initiative, BFL has br-approved 4 million of its customers with a mobile or laptop offer with 3-hour delivery commitment that is expected to be met by the retailer. An e-commerce finance business was launched with a 'Seller Finance' offering for registered sellers of Flipkart and Snapdeal in FY2016, and deployed Rs. 201 crore across 190 sellers in the country. An E-Commerce Consumer Finance business was also launched to offer customers the ease and convenience of EMI-based purchasing on the online platforms. Personal Loans Cross-sell and Salaried Personal Loan deployments increased, respectively, by 63% and 75% over FY2015. Growing customer franchise, investment in analytics capabilities, increased focus in expanding business in emerging cities coupled with robust risk management has enabled this strong growth. BFS Direct business, its online initiative, deployed Rs. 525 crore across four different business lines (Salaried Personal Loans, Business Loans, SME Home Loans and Loan against Securities). SME Lending SME lending offers secured and unsecured loans to its customers. Secured lending is done through three product offerings: Loan Against Property, Lease Rental Discounting and Home Loans. Secured SME lending continued to be in a hyper-competitive state throughout FY2016 as it was a year earlier, with loan sourcing being dominated by various intermediaries. During the year, BFL transitioned its retail mortgage business to a 100% 'Direct to Customer' model — in order to benefit from lower costs and create sustainable return on equity. As part of this strategy, BFL, henceforth, will only sell to its large existing customer franchise. While the transition resulted in some de-growth in business volumes during this year, it should deliver higher growth and better financials from next fiscal. Unsecured lending is done through two product offerings: Business Loans and Professional Loans. During the year, BFL launched a digital system for underwriting SME customers for unsecured loans. This removes personal judgment in underwriting and significantly reduces processing costs. An added benefit is higher business growth as a result of ease of processing. To diversify product suite in the Mortgage business, BFL launched Developer Finance Business. It also launched Property Fitness Report for customers as a value added service in FY2016. The Company has continued to strengthen its cross-sell initiative to SME customers with a revamped relationship management approach. In FY2016, it re-enforced a dedicated relationship management team powered by a sophisticated analytics driven technology platform to provide superior customer experience and help grow the business. BFL offers multiple lending products and value added services best suited for these target customers need. Relationship Management business deployed Rs. 1,479 crore between five different business lines: Business Loans, SME Home Loans, Loan against Property, Salaried Home Loans and Loan against Securities. Rural Lending BFL furthered its rural footprint by setting up branches in Karnataka, Madhya Pradesh and Rajasthan in FY2016. It launched a micro, small and medium enterprise (MSME) business as a part of its rural lending business. The rural lending consumer business is done though six product offerings: Consumer Durable Finance, Digital Product Finance, Personal Loan Cross-sell, Salaried Personal Loans, Gold Loans and Refinance Loans. The newly launched MSME business is done through three product offerings: Business Loans, Professional Loans and Loan Against Property. It disbursed Rs. 1,985 crore to 4.47 lakh customers in FY2016. Assets under management of the rural business as at the end of the reporting period was Rs. 1,339 crore versus Rs. 333 crore in the brvious year. Commercial Lending The Commercial Lending business expanded its offerings in the mid-market client segment through launch of three new industry verticals to expand coverage. These were Corporate Finance, Financial Institutions Group (FIG) Lending business and the Light Engineering business. BFL's Auto Component Manufacturers' Financing business remained stable in FY2016. The Company's Construction Equipment (CE) Finance and Infrastructure Finance book contracted by 68% and 26% respectively in FY2016. This is a part of the Company's conscious strategy to exit these two sectors. BFL has made adequate provisioning in these businesses in FY2016 to cover expected losses. Fixed Deposits As at end of FY2016, BFL had a fixed deposit base of Rs.2,243 crore (a growth of 128%), compared to Rs. 983 crore in FY2015, which contributed to 6% of the total borrowings. The fixed deposit scheme has been rated FAAA/Stable by CRISIL and MAAA/Stable by ICRA. Value Added Services In FY2016, BFL partnered with Bajaj Allianz General Insurance Company Limited (BAGIC) and HDFC Life Insurance Company Limited (HDFC Life) to launch a multi-product insurance distribution channel. As an alternate method to focus on retail fixed deposits and cross-sell of other products, a channel comprising independent financial advisers (IFAs) was launched in FY2016. This has generated total business of Rs. 150 crore in the first nine months after the launch via 732 empanelled IFAs. The IFA channel strategy will help diversify the fixed deposit base and also play a key role in aiding customers to make their general and life insurance choices in partnership with BAGIC and HDFC Life. Financial Performance Table 4 gives BFL's financial performance for FY2016 vis-a-vis the brvious year. Chart B plots profits after tax over the last five years, while Chart C plots the movement of net owned funds. Risk Management and Portfolio Quality As an NBFC, BFL is exposed to credit risk, liquidity risk and interest rate risk. The Company has invested in people, processes and technology to mitigate risks posed by external environment and by its borrowers. It has in place a strong risk management team and an effective credit operations structure. Its risk management policies continue to segregate the functions of a Chief Risk Officer and a Chief Credit Officer to focus on portfolio management and underwriting respectively. Sustained efforts to strengthen the risk framework and portfolio quality have yielded significant results over the last few years. BFL has also commenced to identify various operations risks inherent in its business model. These involve risk of a loss resulting from inadequate or failed internal process, people and systems, or from external events. It has dedicated a new pillar, the 'Operational Risk Framework' to effectively identify, measure, report, monitor and control such risks. The Company's conservative approach to portfolio management coupled with rigorous review mechanisms enabled it to get early stress signals in the infrastructure sector and take corrective action in its infrastructure and construction equipment business. As mentioned before, BFL ended the year with a net NPA of 0.28%. The Company continues to have a conservative provisioning policy which is significantly more stringent than the RBI norms. Analytics BFL continues to evolve in its journey where analytics, backed by top-of-the-line technology, is core to the Company's business strategy. It uses analytics capabilities for making appropriate product offerings to customers, marketing campaign management, risk management and customer experience. It has built a combrhensive range of brdictive models including propensity to purchase, application scorecards, behavioural scorecards, collection scorecards and fraud scorecards. BFL has, and will continue to, actively invest in analytics to create customised cross-sell propositions for its customer franchise, deliver attractive yet suitably differentiated propositions and enhance productivity, efficiency as well as profits. Asset Liability Management (ALM) BFL had a total borrowing of H 37,025 crore as on 31 March 2016. The Company's Asset Liability Committee (ALCO), set up in line with the guidelines issued by the RBI, monitors asset liability mismatches to ensure that there are no imbalances or excessive concentrations on either side of the balance sheet. BFL continued to raise longer tenor borrowings in FY2016 as well, which included Rs.290 crore of Tier 2 subordinated debt. Till date, BFL has assigned Rs. 4,011 crore of its receivables including Rs. 1,026 crore assigned in FY2016. The cumulative amount of assets transferred through assignment, outstanding as on 31 March 2016 amounted to Rs. 1,473 crore. The Company continues to closely monitor liquidity in the market; and as a part of its ALCO strategy, maintains a liquidity management desk to reduce its liquidity risk. The liquidity buffer is stepped up whenever there are early signs of tightness in the system. Technology BFL has been a leader in technology adoption among NBFCs. It continues to leverage technology across businesses to launch new products, enhance customer acquisition and servicing processes along with simplifying the back-office. In FY2016, the Company, with the help of technology, expanded its EMI Card offering to cater to wide array of financing of retail spends by implementing a robust and scalable Card Management Platform, a Decision Support System (DSS) for unsecured SME businesses, a Mobile App to acquire new customers in the Consumer Durable business and a new Customer Relationship Management for its Relationship Management business. Additionally, during the year, BFL also started investing in Big Data Analytics and Digital Marketing. Disaster Recovery (DR) data centres have been set up to ensure business continuity for customer acquisition, loan processing and servicing. Customer Service BFL continues to remain customer centric in its policies and practices. It provides its customers multi-channel options across call centre, IVR, online portal, branch and mobile applications. It also annually benchmarks its customer service practices by seeking feedback through an independent customer service survey. During the year, BFL received the ASA (Authentication Service Agency) license from Unique Identification Authority of India (UIDAI). This will enable the Company to get customers' KYC (Aadhar) information electronically, thereby in delivering a superior buying experience to customers across all lines of businesses. Human Resources The Company continues to lay emphasis on people, its most valuable resource. In an increasingly competitive market for human resources, it seriously focuses on attracting and retaining the right talent, and provides equal opportunity to employees to deliver results. During FY2016, BFL added 3,650 employees, taking the total employee strength to 7,394. In FY2016, BFL was recognised as among the top employers in the Banking and Financial Services industries category by Great Places to Work Institute. It was also recognised by AON Hewitt in its ranking of the best employers in India. Awards 1. August 2015: CIO 100 Award: BFL won TISS LeapVault CLO Award in Best Virtual Learning Program category. Our nomination entry was focused on ILLUME, its features and how it can bring tangible business value to the organisation. 2. December 2015: Business Today - India's Best CEO 2015: Rajeev Jain, Managing Director and CEO of the Company, was recognised with India's Best CEO award for NBFC sector by Business Today. 3. March 2016: Great Places To Work - Top 25 Workplaces in Asia: BFL has been ranked 16th among the top 25 best places to work in Asia by the Great Place to Work Institute. 4. March 2016: AON Hewitt Best Employers in India: BFL has been recognised as one of the Best Employers in India, for the third year in a row in the AON Hewitt Best Employers Study, 2016. Internal Control Systems and their Adequacy BFL has an independent internal management assurance function which is commensurate with the size and scale of the Company. It evaluates the adequacy of all internal controls and processes, and ensures strict adherence to clearly laid down processes and procedures as well as to the brscribed regulatory and legal framework. The Company has further strengthened its internal audit function by investing in domain specialists to increase effectiveness of controls. The Audit Committee of the Board of Directors reviews the internal audit reports and the adequacy and effectiveness of internal controls. Fulfilment of the RBI's Norms and Standards BFL fulfils and often exceeds norms and standards laid down by the RBI relating to the recognition and provisioning of non-performing assets, capital adequacy, statutory liquidity ratio, etc. The capital adequacy ratio of the Company is 19.50%, which is well above the RBI norm of 15%. Consolidated Financial Statement Table 5 gives a summary of the consolidated financial performance for FY2016 consolidating the results of its wholly owned subsidiary Bajaj Housing Finance Limited, which received a certificate of registration dated 24 September 2015 from National Housing Bank to carry on the business of (non-deposit taking) housing finance. The operations of the subsidiary in FY2016 were not significant and hence the consolidated profits of BFL almost equal its standalone profits. Cautionary Statement Statements in this Management Discussion and Analysis describing the Company's objectives, projections, estimates and expectations may be 'forward looking' within the meaning of applicable laws and regulations. Actual results may differ from those exbrssed or implied. |