Bajaj Finance's Strategic Pivot: Building Resilience in a Crowded Credit Market
In a bold strategic move, Bajaj Finance Ltd is consciously sacrificing immediate profitability to fortify its balance sheet for long-term stability. This decision comes as the non-banking financial company (NBFC) navigates an increasingly competitive retail lending landscape where traditional growth engines are showing signs of fatigue.
Quarterly Performance with Conservative Adjustments
The company's consolidated profit after tax for the December quarter (Q3FY26) demonstrated resilience, registering a 23% year-on-year increase to ₹5,317 crore when excluding accelerated provisions for expected credit loss (ECL) and exceptional charges related to new labour codes. However, these adjustments reveal a more nuanced picture of the company's financial health.
Bajaj Finance has recalibrated its loss given default (LGD) policy to adopt a more conservative stance, resulting in a one-time accelerated provision of ₹1,406 crore for expected credit losses. This LGD adjustment reflects management's concern about excessive consumer leverage and borrowing from multiple lenders, which could potentially impact recovery rates.
Rising Competitive Pressures
Management revealed during earnings discussions that competition in the retail lending space has intensified dramatically, now standing at three times pre-COVID levels. This surge is partly attributed to public-sector banks playing a more active role in retail lending, creating a more crowded marketplace that demands strategic adaptation.
By implementing this more conservative LGD approach to 'shockproof' its balance sheet, Bajaj Finance anticipates annual credit costs to increase by ₹300-400 crore. Additionally, new labour codes are expected to elevate staff costs by ₹100-125 crore. Based on Q3FY26's normalized profit after tax, these adjustments should translate to a 2-3% quarterly net profit reduction moving forward.
Operational Metrics and Growth Segments
Despite these strategic shifts, Bajaj Finance maintained solid operational performance. Net interest income grew 20.6% year-on-year to ₹11,318 crore in Q3, with margins remaining steady and nearly tracking assets under management (AUM) growth of 22% to ₹4.86 trillion. The cost of funds continued its downward trajectory, dropping 7 basis points sequentially to 7.45% as benefits from Reserve Bank of India's rate cuts materialized.
Fees and commission income (net of payment) expanded by 15.4%, while operating expenses rose moderately at 11.5%. Consolidated credit costs improved sequentially, declining to 1.91% from 2.05% as the standalone entity continued recovering from asset-quality issues in the captive two-wheeler and three-wheeler finance segment.
Traditional Growth Engines Moderating
The company's traditional loan-book growth drivers showed signs of deceleration. Urban business-to-consumer (B2C) loans or personal loans (constituting 21% of AUM) moderated to 20% growth from 25% in the previous quarter. Similarly, MSME loans (11% of AUM) increased by just 11%, down from 18% growth in Q2.
In response, Bajaj Finance is rapidly scaling new segments including:
- Gold loans
- Commercial vehicle loans
- Tractor finance
Though currently representing less than 5% of the loan book, these segments hold significant growth potential. Strong gold prices could particularly boost lending against gold, while management at Tata Motors' commercial vehicles company indicates signs of growth picking up in the CV cycle.
Future Outlook and Market Positioning
Bajaj Finance's management will provide FY27 guidance after Q4FY26, with the consolidated loan book growing at 22% in Q3 - its slowest pace in 11 quarters. Despite this moderation, analysts broadly anticipate slightly higher compound annual growth in earnings per share (EPS) over FY26-28.
The stock currently trades at 20 times estimated FY28 EPS based on Bloomberg consensus, a valuation that appears rich given management's acknowledgment of intensifying competition. While Bajaj Finance could potentially maintain 20% annual loan book growth through its extensive geographic presence, the crucial question remains whether it can achieve this while preserving healthy asset quality.
Management remains optimistic about capping credit costs at 1.65-1.75% from next year despite the LGD policy changes, suggesting confidence in their strategic reorientation toward long-term stability over short-term gains.
