Bajaj Finance Limited (BAJFINANCE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Bajaj Finance Conference Call for 4Q FY '20 business highlights and COVID assessment, hosted by JM Financial Institutional Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Karan Singh from JM Financial. Thank you, and over to you, sir.

Thank you. Good evening, everybody, and welcome to Bajaj Finance's call to discuss fourth quarter FY '20 key highlights and COVID-19 assessment. To discuss, we have on the call Mr. Rajeev Jain, who's the Managing Director; Mr. Sandeep Jain, who's Chief Financial Officer; and Mr. Deepak Bagati, who's President, Risk and Collections. May I request Mr. Rajeev Jain to take us through the fourth quarter key highlights and his assessment of COVID-19, subsequent to which we can open the floor for Q&A session. Over to you, sir.

Thank you, Karan. Good evening to all of you. I hope you and your families are safe. For today's call, as Karan mentioned, I'll be assisted by Sandeep, our CFO; and Deepak, our CRO. Over the next 20 minutes, I'll briefly cover our assessment of COVID-19 on BFL. Thereafter, we'll open for questions. So please pardon me for my monologue for the next 20 minutes. The speed and ferocity of COVID-19 is unprecedented, is to say the least. 1/3 of world population, as you're all aware, at this point is in full or partial lockdown mode. Unimaginable, less than 20 days ago, no continuity plans could have ever forecasted such a scenario. Nations, corporations, individuals are all faced with difficult choices on an everyday basis and have to make decisions using limited information or rely on common sense in absence of any empirical evidence of such a crisis. At BFL, we are doing the same on an everyday basis. My articulation over the next 20 minutes will be sequenced by global impact followed by India impact, followed by RBI actions and finally followed by impact on BFL and various scenario plans that we have created at this juncture. Let me just quickly start with global impact. As you're all aware, COVID-19 is the single biggest health scare since Spanish flu of 1990. We all experienced the last big crisis in 2008, but it was a financial and economic crisis. As you are all aware, it had material impact on financial well-being of nations, corporations and individuals. However, 12 years later, it's difficult to even remember fully that it happened. Since then, in general, economies, corporations and individuals have all experienced vast improvement in their overall wellbeing. That's my brief point. These are exceptionally tough times, but they too shall pass. In the last 20 days, given the sudden shock of COVID-19, at this juncture, global economy in 2020 is expected to contract by 100 to 300 basis points. And these are, mind you, the early estimates. This is against the growth forecast of 250 basis points prior to COVID-19. This is also, of course, subject to all major economies taking bold fiscal measures. Every past economic crisis has seen strong fiscal stimulus, which ensured that there was a quick and strong economic recovery. Let's get closer home, to India. And the first 3 quarters of the economy were really slow, various fiscal stimulus measures implemented by the government, aided by a good monsoon were beginning to result in revival of demand outlook by each passing month. Clearly in our assessment and our experience, economy was on the mend. COVID-19 has brought the entire economy to a grinding halt for both demand and supply. As a base case scenario, a 21-day lockdown along with a restart lag would result in 1 month of nation's GDP loss. For a $2.7 trillion economy, that means $200 billion to $250 billion of GDP loss as a base case scenario. As we're all -- as we are -- as we read about it, it is possible that the lockdown could even last longer. The cascading impact of COVID-19 lockdown and the likely social distancing measures are expected to be material as well. If the measures are effective and there is no second round of large-scale lockdowns, we should see some demand revival by July and hopefully, full normalization by September, October. Our assessment is that FY '21 will be more like a 10 to 10.5 months fiscal as a base case scenario at this juncture. Clearly, in our assessment, economy needs bold, innovative and unprecedented fiscal support to navigate through this sudden shock. The fiscal measures could be short and need not be permanent. However, without bold fiscal support, revival process could take much longer. Let me just give you -- jump to RBI actions and the sector's need. Prior to COVID-19, the overall systemic liquidity was already quite strong at nearly INR 300,000 crore. RBI to provide confidence to financial sector and to ensure sufficient liquidity did target at LTRO, reduce CRR and increase the limit under MSF, as you must be aware. Overall, creating additional liquidity of INR 374,000 crore. MPC maintained its accommodative stance and reduced policy rates to 4.4%, lowest ever reported. RBI also took the unprecedented measure of permitting moratorium for all loans, wholesale and retail till May 31. We applaud them for the same. However, there are moral hazards and potential behavioral issues of borrowers that we need to be careful about. We also believe that given the severity of the shock, more such measures will be needed for the entire financial sector in specific for NBFCs, NHFCs, a direct low-cost borrowing window from RBI for up to 12 months across the board, onetime restructuring option without classification change and freezing of DPD or the customer till the moratorium -- till the end of moratorium period. These additional measures would significantly reduce the possibility of any systemic [ limitation ] in the financial sector. Let me now jump to the home ground, which is BFL. BFL, overall, has had very strong 3 quarters of FY '20 with balance sheet growth of 35%, profit growth of 53% and stable gross and net NPA, despite a 16-year record low GDP growth in FY '20. Its return on assets and return on equity have remained quite strong due to operating leverage gains, efficient risk management and tax cuts. The company has faced what -- when I look back, company has faced what I would call 3 big challenging situations in the last 4 years. DeMon in '16, IL&FS failure in '18 and a 16-year lowest GDP growth environment in 2019. Its entrepreneurial culture and distinctive business strategy ensured that company profitably grew its businesses as it navigated through these challenges. While COVID-19 crisis by far seems to be the most brutal in my assessment, I am confident that company's entrepreneurial culture and distinctive business strategy will help it navigate this once in a lifetime, I hope, tough and challenging period. For the Q4, as you may have reviewed, we released to the stock exchanges in the morning, despite a 10-day loss, the company continued to grow its assets, loans and new customer acquisition in a steady manner. Customer franchise grew to 42.6 million. During the Q4, company acquired 1.9 million, it was an 80-day quarter only. If it was not -- if it was a full 90-day quarter, we would have acquired 2.2 million customers. We could not -- we lost around 350,000 customers in -- as a result of the lockdown in last 10 days. New loans book were 6 million versus 5.8 million. We lost about 1 million new accounts is what would have got booked in the last 10 days, given Gudi Padwa was in the office on 25th, 26th. Assets under management grew INR 247,500 crores. And company lost around INR 4,750 crores of AUM as a result of 80-day quarter. Let me now jump to how we are approaching this crisis in the last 2 weeks since the lockdown. Attitudinally, as a company, we have an option to be optimistic, pessimistic and cautiously optimistic. We as a company and management along with shareholders, are choosing to be cautiously optimistic because we believe the financial institutions have to always remain open for business at all times. It's extremely important at this point in time for us to hold our nerve and make prudent decisions in the long-term interest of the company. Let me now jump to balance sheet and P&L view. Clearly, protecting the balance sheet should be everybody's primary role at this juncture. There are 4 key aspects to balance sheet protection in current situation, namely liquidity, capital position, strong loss provisioning and deposit franchise. On liquidity, company ended March 31, with consolidated cash position of INR 15,900 crores. Its CP borrowing is less than INR 2,000 crore. Its maturities over the next 3 months are lower than the incremental flows expected over the same period. It has another set of undrawn lines to the tune of INR 2,500 crores. So we are very sufficiently safeguarded from a liquidity standpoint. On capital, we are very well capitalized with a 25% capital adequacy ratio. At this point, among -- we are amongst the most capitalized companies in financial sector among large companies. On loss provisioning, historically, company has continued to remain extremely prudent in making provisions for anticipated losses. Given the unprecedented and sudden shock of COVID-19, company is considering provisions against identified large accounts as well as a onetime provisioning for potential impact of COVID-19 in Q4. This will ensure that we create some degree of suspension in the balance sheet at this stage. On deposits, that's the last aspect of our balance sheet. We ended with a deposit franchise of INR 21,400 crores, with only 28% contribution from bulk deposits, 72% of the deposits are retail deposits. That's on the balance sheet quickly. Let's now talk about P&L. Given the complexity of P&L, I thought what I will do is to deconstruct the same as demand, revenue, OpEx and credit costs. Let's quickly talk about demand. As I mentioned earlier, prior to COVID-19 shock, the economy was already on the mend. It was very visible and evident in semi-urban and rural India. We are hopeful that if the lockdowns are not extended, and we do not observe another national lockdown sometime over the next few months, we could see demand revival in our categories starting June, July and restore, hopefully to full normalcy by October, November. I'll cover 3 different scenarios of how we are taking -- how we are planning this in just a few minutes' time. Given the diversity of our businesses, I thought I'll just give you some texture on categories of our businesses, the way we see it at this point in time. If you take our 2-wheeler and B2B businesses, which are point-of-sale businesses, it's 19% of our balance sheet, all parts of this business are currently in lockdown, whether it's off-line or e-com. Some portion of the lost sale could be recovered in this business in the balance sheet still is what our view at this point in time is. Retailers, in general, were well-stocked with a 30- to 45-day inventory prior to lockdown. It's strange that less than 30 days ago, our entire COVID-19 focus was on supply side issues, whether China would have -- China would be able to supply goods to the air conditioners and so on and so forth, will retails be well-stocked or not. And that's changed suddenly to a demand-side environment. Q1 disruption, however, in our assessment will be more severe as it is be a 60-day quarter. Demand outlook for balanced fiscal will be a function of length and intensity of lockdown. The B2B business of ours is highly granular with presence in 2,300 cities and towns in India. Our 24,000 off roll staff across 2,300 cities will be at stores within 48 hours of store opening is really how our preparedness at this point of time is. Our B2C businesses is the second aspect of our business, which is 20% of our business. In this business, we essentially lend only to existing customers with good repayment track record with us and with the banking system. Subject to credit performance reverting to pre-COVID levels over the next 4, 5 months, we can go back to growth mode in this business. Q1 loss of sale can be recovered possibly in the balance fiscal. This business is as granular as B2B, and it's likely that smaller market may recover lost sales faster than larger markets. MSME is the third line of our business. This business has been under severe strain since the introduction of GST, which aggravated last year due to slower economy. We have continued to grow this business during this period as a result of our focus on professionals and geo expansion. COVID-19 is likely to have a very severe impact on all aspects of this business, including small businesses, professionals and geographic -- and across geographies. Demand will be high, on the other hand, in this business, as small businesses, once lockdown lifts, will want to kick start their business, but lenders are not likely to be forthcoming. Credit guarantee support from government can really ensure that lenders come back to lend easily. Else, we believe that the growth recovery could take anywhere between 12 to 15 months' time. Mortgages, which is 31% of our business, fundamentally, sales process in mortgage is a 30- to 45-day walk. And thus, Q1 will be a 60-day quarter only. Some part of losses can be recovered in the balance fiscal. The challenge in this business, however, is likely to be pricing pressure from banks. While the overall balance sheet would gain as a result of lower cost of funds, this business would struggle a lot more, given where rates have gone to. Risk in this business is not likely to be a challenge. The last -- the second last business of ours is rural, it's 9% of our balance sheet. Recovery in rural is likely to be fastest as rural was already doing very well in Q4, given strong monsoon and stimulus by the government. Rural B2B will revert to normalcy the fastest, and B2C will result to normalcy in line with urban B2C. Commercial, which is 4% of the balance sheet, given the environment and potential impact on commercial clients will work for the foreseeable period only with existing clients. Loan against securities, it's 5% of the balance sheet. Given the stock market volatility, this business has already seen a reduction of 25% in the last 30 to 45 days. The portfolio is currently in the margin of 50%, which is required -- as required by RBI. The recovery in this business will be a function of the markets clearly. We internally are focused on building a retail brokerage business at this point in time. That's on the demand environment. Let me quickly run through revenue. Let me just make a -- reiterate a point that the company due to its very strong orientation to profit and ROE discipline, retail nature of its business, fee orientation and cross-sell focus has significant margin of safety across its various revenue lines. Given its strong liquidity and distinctive credit standing in the market, we do believe that we'll be able to command premium as -- given the liquidity that we have and the supply side is expected to be constrained, we will continue to -- we expect we will be able to get some amount of premium as things normalize. However, we will continue to carry extra liquidity over a period of the next 6 months, resulting in extra cost of carry in our cost of fund line as well. Let me just quickly jump to OpEx now. Clearly, operating expense is something over which we have greater control. Company has created a plan to prune 7% to 8% of its total operating expenses as the lockdown lifts. As an immediate measure, we have decided to hold all our fixed costs at current levels till October. That would mean no incremental replacement hiring, no new branch expansion, no advertising and promotion, 80% reduction in travel, 80% calibrated approach in technology expenses and a hawkish view on incremental CapEx. Apart from these actions, as we look further, there are suspensions in our OpEx lines due to our overall broader operating -- due to our modular operating model. As a measure of prudence, however, we will be further increasing our investments in collections infrastructure is really what our stance is. We've also worked in a plan whereby if the demand scenario is weaker than the scenarios that I'm going to talk to you about, that we'll take a harsher view on operating expenses as the next level plan if the demand environment is weaker. Let me now come to one of the most important parts of P&L, namely credit costs. Before I come to credit cost, let me just reinforce that we are a risk-driven business. Except for a 2-wheeler business, company is focused on mass affluent customers, earning INR 5 lakhs to INR 6 lakhs per annum in urban markets and INR 3 lakhs to INR 4 lakhs per annum in rural markets. 65% to 67% of our customers are salaried and 33% to 35% are self-employed. 65% of our customers have bureau scores of 750 and above. Rest have no bureau score and mainly come from 75-plus markets where bureau is a low due to low penetration of financial products. The SMEs that we deal with or we target have annual turnovers from INR 5 crore to INR 16 crore. The commercial clients we lend to are in general BBB+ clients. The home loan clients are only salaried for the last 2 years with annual incomes of INR 11 lakhs to INR 13 lakhs. Loan against property portfolio of ours are given to self-employed with average exposure of INR 60 lakhs to INR 75 lakhs. So it's quite granular. The developer finance portfolio is 0.9% of the total portfolio. In last, the average exposure is INR 3 crores to INR 4 crores. 2-wheeler business of ours, which I said is the only business where we deal with the mass customer is a captive business. Given the customer segmentation in this business, this business is a lot more vulnerable to credit shocks as experienced in demonetization as well. On the credit cost, before I start, I must say that the situation at this juncture is very fluid. I'll outline the way we are observing it first hand, very clearly. I must add, before I start, I must also make a point that the customer right now is in a state of shock. None of us has ever worked from home or have ever faced such a long and sudden lockdown, nor has the economy ever been stalled for such a long period in such a sudden manner. The impact clearly is very brutal. Given the unprecedented and sudden shock, customer is clearly focused on saving/hoarding cash. In my 25 years of experience, behavioral sciences has never been an area of attention from risk management standpoint. It is so now. It is our reasonable assessment that as customers and businesses get back to work and faster they get back to work, faster situation will normalize. We should get back to normalcy in short period of time. I'm confident that the economy has the resilience to navigate a 21-day lockdown. At the end of the day, we all locked down on 22nd. In 20 days, the structural nature of the -- or direction of the economy cannot change. We did experience the same during DeMon. This, of course, seemed much bigger as a crisis and has lot more uncertainty than in hindsight DeMon had. What we are observing at this point of time from the banking that we've done so far is that the net bounce rate for us as a company are up 2 to 2.5x across all customer segments whether it is salaried, self-employed, doctors, professionals, SMEs. This is across nature of banks, whether it's public sector or private sector bank. No part of the economy, given the wide diversity of the customer that we touch and the sheer volume of customers that we touch seems untouched by this unprecedented sudden shock. The commercial customers, despite their better rating, are seeking -- are proactively seeking moratorium request. Only 1.1% of our retail and SME customers have so far proactively reached out for moratorium request. This is also probably 1 of the reasons why we are seeing elevated level of default or bounce in retail and SME. Based on our scenario planning, I'll share with you very briefly soon, our estimates of credit costs in the next 2 to 3 minutes. The stance that we've taken as a company is to bank all customers who have not requested for moratorium. Historically, 27% to 30% of our defaulting customers in general pay digitally. Rest, 73% of the defaulting customers walk into branches or are collected by field agents. Given the lockdown at this point in time, naturally, field and branch collections activity is halted, and will resume once the lockdown is over. Customers who are unable to pay by month end will be offered moratorium for that month on a suo moto basis till May 31. While customers may be offered moratorium benefits, the company has decided to continue to make provisions as per its historical flow rates. In addition, company will continue to make additional provisions basis emerging data. I now come to 3 key scenarios that we have fundamentally created at this juncture. I must, however, also hasten to add that this is subject to ongoing change as we see data, as we experience what's emerging, as the country takes stance on how long and so on and so forth. There are just -- as you would agree, there are many imponderables. The first scenario in our assessment is that lockdown opens on 14th of April. In this scenario, we foresee business in April to be only 20% of our planned volumes. We expect May to run at 60% capacity and gradually return to 100% of our planned volumes by September. The impact of demand -- on demand is likely to be transient in this scenario, the impact on credit cost is likely to be 40% to 50% higher on a full year basis. The bounce rates and collection efficiencies should return to normal in this scenario by August. We may also have an opportunity to regain some of the lost volume in second half of the year, albeit marginally in my assessment. The second scenario is that lockdown opens on 30th of April. It would have a 40-day -- it would have been a 40-day lockdown in the process, and it's likely to have a reasonable impact on customer psyche. In this scenario, we foresee business in April to be 0, of course, we expect May to run at 30% capacity, June at 70% and return to 100% of our planned volumes by October. The impact on demand, however, is likely to be material. The impact on credit cost is likely to be 50% to 60% higher on a year-on-year basis, on a full year basis. The bounce rates and collection efficiencies may return to normalcy by October. We are not likely in this scenario to gain any of the lockdown lost sales volume. Third scenario is that lockdown was all the way to 49 days and opens only on 15th of May. In this scenario, we foresee business in April and May to be 0, of course. It is likely to have a structural impact on demand across all lines of businesses for the rest of the year. Business in April will be 0, May will be 20% of our brand volumes, June at 50% and return to normalcy of 100% of planned volumes only by sometime in Q4. The company will be forced to take, in this scenario, a harsher view on OpEx and explore a 12% to 15% cut versus the current OpEx cut that I talked to you about of 7% to 8%. The impact on credit costs is likely to be 80% to 90% higher credit cost on a full year basis. In this event, we expect RBI will have to necessarily provide onetime restructuring option to the financial sector. I have come to the end of my monologue. As I mentioned in the beginning, these are highly uncertain times, and we are all forced to make difficult choices and decisions on an everyday basis with limited information and without any empirical evidence, unfortunately. At BFL, as I said, we're doing the same. The strength of the business model, I believe, agile decision-making, strong execution rigor and long term orientation, we believe is likely to be differentiating factor. We have very patient shareholders and an exceptional management team, and we are all hands on deck to tide through the biggest crisis that we have all experienced. Thank you for patient hearing. This transcript, given the long conversation, I have -- or the long the commentary that I have done, we will be posting on the Investor section of our website by 6:00 p.m. today, please do refer to it in case you missed noting down anything. With that, I open the call for Q&A. It would be my request that if point has been covered, repeating it may not be appropriate from a efficient utilization of time standpoint, and I'll go by your judgment on that.

[Operator Instructions] The first question is from the line of Sanket Chheda from B&K Securities.

My question was mainly that apart from the measures that RBI has already announced, you spoke of a couple of more measures that you expect them to announce, 1 of this was dispensation for one-time restructuring. What were the other 2, sir?

The other 2 was direct low-cost borrowing window from RBI for up to 12 months, restructuring and freezing of DPD till end of the moratorium period because there is a little bit of anomaly that those clients who are in default can be given moratorium as of 29th of February, but their DPD is seasoning, which fundamentally means on 1st of June, they will land up moving to 90 DPD plus. So we believe it's our assessment that this will get reviewed by RBI. So these are the 3 things that we expect.

Okay. And sir, 1 more thing, there was a flash on some media channels that PMO and FinMin has got in touch with [ RBI and banks ] and requested them to provide some relief on the compounding of interest on interest and reduce some burden in terms of interest cost. Sir, have you received any such communication? And what is it exactly? It's pretty confusing, so can you throw some light on this?

Yes. So eventually, we'll -- we all have to follow the law of the land. So we'll follow the law of the land as and when or if and when the notification appears. For long tenure businesses like mortgages, it will have a material impact. For short tenure businesses, the impact will not be material. Mainly the impact of this will be on mortgages and on loans, which are longer than 36 months.

And why it would be so, sir, for mortgages?

Yes, because the tenure in case of mortgage business is very long. So for example, if I've not paid interest for the 3-month period, and let's say, my rate of interest is 9%, I've effectively not paid about 2.5% of interest, which will get capitalized as my principal. As you would know, principal component repayment in case of mortgage business, which is let's say 120 to 180 months is less than 2%, 3% of the overall principal. So it will take much longer in terms of -- from a tenure extension point of view for a customer to pay.

The next question is from the line of Jignesh Shial from Emkay Global.

Just 2 quick questions. If I see your scenario 1, 2 and 3, you have given a brief guidance about the kind of credit cost which should be rising. One, are we doing balance of the Karvy exposure during Q4? And number 2, what would be rough impact on the margins in all the 3 scenarios, any major change that will happen on the margin point? I definitely take care of it. There will be some change in the business, which will impact it. But considering that, any rough margin estimate that we'll be having in your mind?

When you say margin, you mean -- so let me give a response to the first question. First of all, we are in a close period. And I -- today morning, we have outlined in our disclosure that we are evaluating. So I cannot share specific numbers on Q4. On 1 of the identified large accounts that you named, we had made our intentions clear as part of our Q3 release. The other account has been in NCLT proceeding for the last 18 months with no clarity insight is really what I would say on that. Can you just -- can you make the point on second question?

Okay. So we will be having a 2-way impact here. Obviously, there will be a [indiscernible] slowdown and the other would be the credit cost, which would also be inching up. That is what credit cost you already added it in scenario 1, 2 and 3. I just wanted to understand, have you build up -- because your B2B is the most impacted in case the lockdown gets extended further. B2C and mortgages is something that even you also highlighted, would be -- you would be able to recover the ground probably in this financial year or a little later than the B2B because the absolute lockdown are more impacting you. In all these scenarios, are you seeing that there would be a major pressure coming up on your margins as well? Or do you think that more or less on the operating level side, the slowdown will be more or less to do with the growth itself and less to do with your lending and borrowing rates? Am I making myself clear?

Yes, yes, yes. No, no, I understand. I have said, Jignesh, that given our strong liquidity, that -- and given our -- and this note will be there for you to refer to. And I'll repeat the point that I made. So that given our strong liquidity and distinctive credit standing, we believe we'll be able to command pricing premium as COVID-19 shock normalizes. So it's mainly a demand-side view. We don't foresee revenue pressure other than the mortgage business. There we do foresee pricing pressure. In other businesses, we don't foresee pricing pressure. Probably, I get some expansion because there are fewer people in the market. But in mortgage, we will see pricing pressure.

Okay. And just reconfirming it. You said you lost roughly 3.5 lakh customers, 10 lakh new loan accounts and INR 4,750 crores of AUM because of the last 10 days of -- as you said earlier. If I add up INR 4,750 crores anyhow to your this thing, still our growth number should be somewhere around 31%, 32%. So our previous 9 months has been 35% roughly. So anything apart from this lockdown, which has impacted us? That is my last question.

I would just say that, as I said earlier, economy was on the mend. If you look at -- so let me give you a sequential view. Clearly, the slower economic output, number 1. And number 2, the -- given our credit costs had gone up, we pulled back on various businesses. If you take our Q1 growth, it was 41%, Q2 growth was 38%, Q3 was 35%, and Q4 is look -- would look like 32% to 33%. So we have pulled back, as I've said, in Q1 and Q2, between 15% to 20% of the growth, we've pull back on. So it was gradually slowing down. And actually, I believe that if COVID-19 had not happened sometime by Q2, we'd be back to a reasonably stronger growth momentum. But that's probably history for a little while now.

[Operator Instructions] We take the next question from the line of Prashant Poddar from ADIA.

Quickly on -- Rajeev, the organization is a quite data-dependent organization. And given that data will not become -- remain dependable in the post-COVID situation, given that there would be moratorium, there would be restructure, whatever -- I mean, there will be relaxation given. And another point is about the fact that government may take lockdown measures again after the first, let's say, relaxation of lockdown, you would not be able to interpret it right now. So in that evolving situation, how would you be taking decisions in terms of incremental lending opportunity?

I think it's a very fair question. So let me just say that to begin with, we'll be very cautious as the lockdown opens. At this point in time, while the risk folks in the company are working on the model, when I talked about the bounce rate, we are seeing it completely structural. 800 customers, 775 customer, salaried customer, existing customer, everybody is -- so it's got nothing to do with risk. It's very evident and clear. Our thought process at this point of time at a 10,000 feet level, Prashant, is that we will be very cautious, number 1. In B2B business, in general, if a model is not working, go with a 30% margin requirement. If you want to buy a television, do buy, we want to be open for business, pay 30% margin. In general, that's the lowest risk outcome. In B2C, we will restrain from doing self-employed for next 3, 4 months. In SME, we will cut the bottom 2, 3 deciles. In commercial, we'll work only with our existing customers. So in some of the businesses like a discretionary point-of-sale business, which is a retail EMI card, we may not do for a while. So we've got a set of actions ready as we get to work. Is there a point that you're making, that's a correct point that we are partially flying blind for the next definitely 45-day period, between 15th of April to early June. That is a fact, I mean. Does that clarify my point?

Yes, yes, yes.

The next question is from the line of Dhaval Gada from DSP Investment Managers.

Rajeev, couple of questions. First is on the bounce rate, this 2, 2.5x increase is in April, I presume, is that correct?

Yes.

Okay. And the second related question is just on the credit cost delta that is given in all the 3 scenarios. Is that on the elevated base of FY '20 or the normalized credit cost that you would have seen in any of the other years. So just a clarification on the credit cost impact that you -- that's in the 3 scenarios?

No, it's a very valid question. It is on base of FY '20, I must just say what I was saying to Prashant earlier, we are in an uncertain zone at this point in time. We will share when we do our investor release for Q4. We will actually share February '20 data rather than March '20 data because March '20 data has also -- is masked by suo-moto moratorium, right? So we will share and you would see in most of the businesses, we were actually seeing improvement. So we were forecasting that by June, July, we would see reverting to '18, '19 credit costs. Between -- and SME would have been the longest lag by September, October. Other than that, we were forecasting July, August back to '18, '19. So at this point in time, Dhaval, to give you a clear view, it's on FY '20.

Understood. And just lastly, on OpEx reduction, could you share the top 3 or 4 items that are driving this reduction? And one would be, obviously, the business origination. But apart from that, what are the other major ones?

Yes. I talked about it, and we'll put it up as well. But -- like we put all hiring on freeze, no branch expansion, no A&P, no travel, significantly -- significant calibration till October in technology, very hawkish move on CapEx. I must just only make a point all this is till October, at this juncture. And as situation moves, we want to remain a growth-oriented company. But at this point, situation demands that we take some of these harsh measures, given that it's one of the few things in our control at this point in time.

The next question is from the line of Suresh Ganapathy from Macquarie Capital Securities.

Just one question. Rajeev, how serious do you think this mall has an issue with? Because -- are the customers really well informed that this is a moratorium and not a waiver? And do you really see this changing behavior or creating some kind of a structural issue? I know it's too early, but just wanted your initial thoughts on this.

Yes. No, it's a very fair question, Suresh. That's the only thing that worries me. And I've said this, that it is unprecedented. Somebody, very senior, I was talking to the U.S. and said he told me that this has never been tried anywhere in the world at this scale. Now -- and as I said, I [indiscernible].

Sorry. The 3-month moratorium...

Yes. Just this kind of wholesale morat, at a nation level, you see morats have been given. Cyclone happened, Katrina happened, morat is given. This is a stall of the economy. And as a result, has to be offered for the broader economy only -- has never -- it's an experiment, let me be honest with you. It seems to be an experiment. So -- and clearly, the only thing that worries me, Suresh, and I hope it's only a worry, that moratorium should not dip into a moral hazard. So we will only know this to the point that we're making when we all bank June/July.

What is the initial feedback on the ground? Have the customers thought this is the waiver...

No. It's a fair question, yes. So originally, people thought it's a waiver. I think we -- various news channels -- a few news channels also reported it as a waiver in local vernacular mediums. As the dust settled, but probably partially the damage had been done. So it is now understood that it is not a waiver but a moratorium. But I think for financial institutions, the walk is going to be a little longer. It will increase our work a little bit is my assessment. It's a pure personal point of view at this point in time. We are all flying blind, Suresh. That's my view at this point in time.

The next question is from the line of Ashish Sharma from ENAM Asset Management.

Just on the collection efficiency infrastructure, you mentioned that we would want to focus on that. But just on a short-term basis, how -- is it possible for a company like Bajaj Finance to sort of raise the capacity? I mean you already mentioned the bounce rates are 2.5x. So by the time, normal -- I mean the lockdown is over -- I mean, collection efficiency -- collection infrastructure is already up 1.5, 2x. Just some color on that, sir.

Yes. So 2 things, Ashish, clearly, no capacity plans allow for 2, 2.5x. It's fundamentally, that is the reason, I'm -- we are giving an elevated view of the credit cost. If you connect the 2 dots, that's the purpose. That if there is increased flow, there is increased flow, whether it is secured, unsecured, increased flow is an increase flow at an experiential level. The only thing that is -- our RR collections folks working at this point in time on, as the lockdown lifts, what is the plan? It's work in progress. That's point number one. Point number two, the only thing I would make. Given our granularity, outside of 50 markets, it's much easier for us to pull it off because the numbers are much smaller by markets. So on the 50% of the volume, it is much easier to pull it off. The issue will be the first 25 markets. Unfortunately, however, 25 markets would be 40% of the business. That is really where the bigger challenge would be. We are increasing communication with the customer. We are increasing counseling with the customers, the earlier question that Suresh was also asking, given some damage has been done previously. Counseling, increase communication to the customer, and we are working on augmenting capacity at this point in time, Ashish, but it's work-in-progress, I must just say.

Okay. And just one clarification. You mentioned how -- what percent of the retail customers have seeked moratorium at this moment?

We gave to 900,000 customers, a moratorium in the month of March. Sandeep is correcting me, 900,000 in non-AF and 300,000 in AF. Auto finance is 300,000 and...

Non-auto finance is...

Non-auto finance is 900,000.

The next question is from the line of Shubhranshu Mishra from BOB Capital Markets.

This question is actually to Deepak. I just wanted to understand what -- in the pre-COVID levels, what was your collection infrastructure like? And given that we have this uncertainty, but then we are seeing the 2.5% increase in the bounce rate. So how are we going to increase the throughput? And as we are going to increase the throughput, it's going to have an effect on the OpEx. So how are we going to reduce the OpEx or at least manage the OpEx to maintain the level of gross NPA?

So as I said, that's the only line in OpEx, which we'll see investments in the short-to-medium term. It's likely to be medium term more than short.

Sir, further if you can explain me what is the collection infrastructure for the normal bounce rate? And then get to the second part.

So out of 22,000 people, 4,500 people in the company work in collections. We essentially run, fortunately, a lot more modular model that we don't collect. It's agency infrastructure that collects for us, gives us greater flexibility, scalability to expand the infrastructure. But of course, as I said, not to the extent of, is there a scalability to the action of 20%, 30%? The answer is yes. Is there a scalability to the extent of 2x? The answer is, no. So that's the level 1 point. There are 30,000 field staff who work for the outsourced agencies at this point in time and 3,500 callers. So in all directions, we're working with our agency infrastructure that as we come back on stream, whether fully or in part as a country, how will we rapidly expand. I must just make one point, despite the fact that these are outsource agency infrastructure, we've gone ahead and all our outsourced staff, whether it is a sales outsource staff, which is 25,000 or another 30,000 of this staff have all been paid fully. We want to remain open for business as we come back both on the business side and on the collection side. The -- I want to make the third order point that I made earlier, that 50-plus markets pose much lower risk. It's the 1 to 50 market that will pose a much higher risk. It's work in progress, as I said, Shubhranshu.

How many agencies are in the top 50 markets? And how many agencies in the...

If I make a point, that when we come for our Q4 results, we will provide greater color. I think that's what we can, at this point in time, comment.

The next question is from the line of Piran Engineer from Motilal Oswal Financial Services.

I just have 1 or 2 questions. In the base case scenario where in the lockdown ends in the next 10 days, and we slowly gradually pick up on disbursements, what would our even growth be like in FY '21, given that bulk of our book is locked down?

Yes. So if it's scenario one, and we all hope and pray it is, the material impact on the growth and the P&L will not be significant. It will probably be some growth loss, some profitability loss for a fiscal. The numbers, to be very fair, we've given you as clearer view as we have based on credit cost, based on volumes. But it would be, if I may say so, hazardous at this point in time to give specific numbers. Give us time till our results, we should have hopefully greater clarity. See, if it opens up, we -- while we are in completely in touch with our B2B ecosystem, we will have to just to wait to see what is the response. I have seen in demon that the country got back to its feet very quickly, given the young population. And I am amazed in hindsight about the speed of the response of the nation. I am banking that adversity. So -- but doing a forecast, and I have already done a reasonable forecast for you guys in terms of how we see impact on each line would maybe -- specific numbers may be inappropriate at this point in time.

That's fair. And just secondly, a data point, what percentage of our SME loans is professional loans? And professional is mostly doctors, right?

Yes, only doctors. And there are not chartered accountants, but chartered accountants is much smaller component. For lots of you who are chartered accountants, it performs better than even doctors. So...

So what's that proportion within SME?

Yes. So out of 13%, 8.5% is business loans and 4.5% is doctors. As I said earlier, that's one of the reasons why we've been continuing to grow. The share used to be 80-20. In the last 3 years, it's moved to 60-40 virtually. In fact, I think the number is a little higher, if I'm not mistaken.

So I'm guessing that 4%, you would not be averse and -- or cautious in terms of disbursement, right?

Sorry, sorry, I lost you.

For the doctors' part of it, it will be business as usual. In your initial comments, you said that you'll be cautious on SME Lending in FY '21. But I'm guessing it is only for the business loan part of it, not for the doctors' part of it?

The doctors are not doing OPD for the last 2 weeks. Look at the severity of the impact across the ecosystem. Hospitals are closed. You would think hospitals should be the place booming business. Hospitals are closed in India at this point in time other than COVID-19. So the severity of impact don't underestimate the breadth of it. So India has 1.5 million doctors, all are at home. Other than a few who are -- and who are junior in general, manning the hospitals.

Next question is from the line of Prateek Agrawal from ASK Investment Managers.

Yes. Rajeev, I just wanted to understand how your B2B accounting works and does the moratorium apply on that plant as well?

Yes. Maybe Sandeep can explain.

Yes. So when you say accounting, I'm assuming that you refer to how do we recognize revenue in case of B2B business.

Yes. Because my whole thought comes from that explicitly, you say it is 0 interest. So if a moratorium applies there then nothing accrues on the balance sheet to be future received, while you continue to pay your banks, whatever you have negotiated.

So we account subvention or income that we get from manufacturers and retailers over the tenure of the loan, which is on effective IRR. The effective IRRs work anywhere between 24% to 25% in case of B2B business. And to your specific question in terms of moratorium, whether moratorium will be offered to consumer electronic or B2B customer. The answer is yes. We don't sell the product as 0% installment business. We sell it as no-cost EMI. That benefit is available to the customer for the contractual tenure of 8 to 9 months. If the customer pays through that time period, absolutely he doesn't pay any cost. However, if the customer needs an extended tenure because of moratorium, he'll have to bear the cost of interest loss that otherwise will happen to Bajaj Finance.

Okay. So in this case also, while it is regulatorily mandated, the client pays the interest cost?

Yes.

Yes.

The next question is from the line of Pritesh Vora from Mission Holdings.

My question is not with a COVID, but just business in general and consumer business. What we have noticed at the -- recently, there are a couple of POS manufacturer have come and landed in the credit card business. They have raised the funds up to $300 million, and they tied up with 15, 16 banks. To offer the credit on the credit card business, how the threat it is with respect to that particular business model?

So credit card business. So we look at it in a different way. The competitive intensity in the B2B business over the last 2.5, 3 years, has increased dramatically, given our dominant share in the business, we are the defenders and the rest are challengers. I look at it a very simple point, what is the share of subvention from manufacturers. In general, in the consumer electronics business, 70% of the subvention pool for the last 12 years, which includes the last 3 years, continues to come to us. In the digital products financing business between 16% to 17% of the share of manufacturers of subvention from digital products, manufacturers continue to come to us. That share has not moved. Rest, if the share of business is growing as a result of a differentiated model, so be it, they really doesn't bother me.

No. My question was -- sir, my question was in respect to the recent offering, they were offering credit card business, but now they are offering on debit card also. And what they -- they're tied up with the various banks, earlier that tied up was not there. So being a third-party POS machine provider for an end customer it's a very easier thing because at any of the business card credit card he has, if the third party is a neutral guy, he can avail this facility on credit card. He does not have to pay the processing fee to Bajaj. So if...

Very fair. So fundamentally, look, the key nuance, and you should try it, that's the important point I'm making. That we offer across various SKUs, we offer schemes by SKUs, the POS machine infrastructure, number one, infrastructure -- credit card offerings, in general, are vanilla, 3 to 4 product offerings you get. That's the key difference versus 12,000 SKUs across which we offer customized solutions versus 4 vanilla offerings. That's the key difference.

No, my -- sorry to persist on this question. But what I understand is they are increasingly raising the fund with the international investors, and they are expanding their subvention scheme and tying up with manufacturers. So I get your point that you still command 60% to 70% market share. But this credit of POS machine is independent POS provider is real because earlier if any one bank has a POS machine, the credit card of other bank does not work. But in case of a neutral guy coming and taking over POS infrastructure, he can tie up with all the banks.

Yes, that's very fair. Yes. So fundamentally, look, the point is not, one, I said in terms of offering, second, it's about risk management. And third, as we are discussing over the call, it's about collections infrastructure. As long as somebody can do all 3, there is no reason why that this market needs to be constrained of competition, more people should do it. So we have faced threat from banks over the last 2.5 years, we'll face a threat from a technology services provider, that's fine, who is essentially aggregating on behalf of various institutions that's absolutely fine. It's a new competition. Does that answer?

Only thing you mentioned about is collection.

Sorry?

You mentioned about the collection infrastructure, that's a unique asset to us. But in this model, the collection depends upon the credit card provider. So they don't have to replicate or invest into any of the collection infrastructure because that falls on a credit card supplier.

Yes, that's very fair. Yes. Now let me bring -- make that point that the country continues to have only 34 million, 35 million credit cards. The -- as you would observe from the loans that we've done, we did last year, 29 million loans. The presence of cards, credit cards, mainly because it doesn't exist for debit cards, exists only in top rate cities in India. From the 15 city, fundamentally, the degree of the presence is extremely low. If I may just request you, that just in the interest of time, if you can circle off-line with Sandeep, he should be able to give you greater clarity.

[Operator Instructions] The next question is from the line of Reena Verma from Burgundy Asset Management. Ms. Reena Verma from Burgundy Asset Management.

Hello, can you hear me?

Yes.

Yes, I can hear you.

I have just 2 small questions. One is with regard to the difference between scenario three and the other 2 scenarios, it seems like you expect a big pushback in the recovery in the -- in scenario three. Is that because supply side disruptions take over? Or is it because of particular geographical exposure, if you can please give us some insight there. And a small add-on question is that given the reliance of your business model on the salaried employees or the salaried professionals, could it be that you will have significant back-ended pain because most people will not file for the next 3 months, but you're likely to see a lot of restructuring later in the year.

So I would just say that, as I said, as part of 3 scenarios that if we can, in general, scenario one is the most preferred scenario. We can all -- it will -- COVID will be part of our lives, but at least will not be part of our economic -- will not have convert into an economic catastrophe as much as it's a health catastrophe. So the preference is scenario one, but it really doesn't matter what my preference is. The lagged impact -- so if I just articulate your question. One is you're saying, is it likely that there is a lagged impact, right? That's first question. What is the second question, Reena, if I may?

So I have 2 questions, Rajeev. One is that in scenario three, your recovery to 100% of planned volumes takes much longer, almost double the time it takes in scenario one and two so what are those variables that change between, say, scenario one and two versus scenario three? And my second question is that the salaried, since they will perhaps have some form of -- kind of at least optical protection for the next few months, do you think there could be back-ended shock in terms of demand?

Yes. No, I think the -- it's our assessment, Reena, at this point in time what I said earlier, that behavioral science is going to play a big role from a risk management standpoint. The longer it takes, longer the impact on demand driver -- demand coming back and risk management back to order. So in a way, longer the period of lockdown, the impact is more like a -- it's very similar, it will be geometric progression rather than arithmetic progression. So it will be a geometric progression. Yes, the longer it takes. From a psyche standpoint, customer is going to be what they say, customer will lose it. So clearly, some degree of breather is expected parts of India, most parts of India, phased lifting or lockdown will be very essential is what our assessment is at this point in time. So behavioral sciences is going to start to play a very meaningful role, if I respond to your point, as time passes. So that's 1 point. On lag impact, shorter the period, less likely the impact is expected to be on jobs and so on and so forth. You're right at 1 level that people will pay salaries for April, May, June. We are -- but if it persist beyond May or middle of May, companies will go into high gear by end of April on working on cuts. As I mentioned, Reena, that this is all good till May 31. If we are going into longer lockdown, then clearly, a 7% to 8% cut goes, probably goes to 15%, 20% cut. Now as I said, this is all dynamic. It's fluid and let's all hope that given the huge self-enforced lockdown that the country has experienced, we are out of trouble quickly.

Rajeev, thank you very much. In the interest of time, I'll just ask you just one small follow-up, which is if everything goes as per schedule, which is the lockdown is lifted immediately after 21 days, overall to your business model because of the reliance on salaried class, is there a significant risk? Because in your Q3 commentary, prior to this event or this situation, you had mentioned that you were already kind of being very cautious with your demand commentary. And I'm just worried whether this may have pushed back or kind of changed your demand outlook very significantly, even if it's just a 21-day shutdown.

We will never know, Reena. We will have to -- I believe a 21-day -- the economy is more resilient than that, that a 21-day lockdown should not eventually have a material impact, but longer lockdowns, it's very hard to tell. So now that's our point of view. It need not be correct.

The next question is from the line of Deepak Agrawal from Axis Mutual Fund.

Sir, just wanted to understand if you actually look at the portfolio, say, sector-wise, so like, say, tours and travels or hotels, which are very deeply affected and the recovery will be back-ended in these sectors. So what percentage of borrowers or, say, the AUM would be related to these riskier sectors?

In general, rather we don't lend to hotels, restaurant, aviation. We, in general, are also very cautious in lending to their employees as well. So the impact of some of the sectors that you talked about, like hotels, restaurants, aviation is likely to be very low. I must just only articulate and reiterate that no sector is untouched by this event. These are in the frontline. And our -- as SMEs, we don't lend to them through our SME business. Even to the employees of these companies, we are very, very cautious. So that's the natural response.

Got it. Sir, just another question. So now as you mentioned 9 lakhs is the number of borrowers who have taken the moratorium on the non-AF side and 3 lakhs is roughly on the AF side. So roughly 1.2 million borrowers. If you have to look as a percentage of these borrowers who were supposed to pay in this month, what percentage would be that?

Percentage of customers banked, that's what you mean, right?

Yes. Just to understand, how many actually, say, 10% of the people took the moratorium of 20% or 30%. So how should we look at it?

So the banking is 20.5 million -- banking was 20.5 million.

The next question is from the line of Shweta Daptardar from Prabhudas Lilladher.

Just 2 questions from my side. So you mentioned the customer franchise today stands around 43 million. So given the current headwinds and in light of the scenarios you presented, especially in the base case scenario where we are estimating lifting of the lockdown in the next 21 days. So how do you see the customer addition run rate panning out there, like we moved from 1.1 to almost 2.2 in last 1.5 years?

Yes. So clearly, as I said earlier, to begin with, we will have a very cautious view. As I said earlier, that we will, in general for the next 2, 3 months, clearly do lending, which is -- in the B2B business, which is really what acquires most number of customers for us, a 30% minimum margin requirement. So it will be slow -- it will be quite -- it will be reasonably slow or it will be severe, as I said earlier in Q1 and hopefully, should get back to some degree of normalcy, fully by fourth quarter, and if we are lucky, in Q3.

Okay, okay. Sir, next, just a request. So in light of you were mentioning a higher prudential provisioning, would you also provide during your Q4 investor release, the LGD and other assumptions so that we could articulate and reconcile?

So we do provide stage-wise breakup of the loans. You can very clearly see the kind of provision that we make depending on the stages of the customer, we will keep providing it.

Yes. Because the assumptions would undergo severe change now, right? So in light of that. And sir, just one lastly, I would like to squeeze. What is our on book cost of funds as on today?

So let me just complete the previous question. So what we report so far is stage-wise provisioning and the provisioning coverage ratio. Your question of LGD needs to be forecasted as part of macro-environment framework. A larger set of provisioning will be required in stage one. So the LGD factor may still not change on the customer, which are already in NPA, that's where you actually see the LGD. But we'll see over the next 3 to 6 months' time' as to how the number pan out and accordingly take more provisions if required in future.

Fundamentally so far to add to what Sandeep is saying, we used to run our ECL models once a year. We are -- we have anyway -- anyway as part of the -- as part of our internal -- as part of our internal process, we've decided around it twice a year. We will run once in August every year, and we'll run once in March. That will be our process going forward. So along with Q2 results, you will see a rerun ECL model. And along with March quarter, you will see based on the latest data. Because if the economy or like in the situation, things change too rapidly, we'll need minimum time to run the ECL models. That's the only limited point I would make.

Right. Right. Fair enough. So what is our on-book cost of funds as on today?

We are in close period. I won't give you that number at this point in time. As Rajeev mentioned, the focus at this point in time is maintaining abundant liquidity in the balance sheet. We have given that number, INR 15,800 crores as on 31st March, provisional number, of course. We keep focusing at this point in time to remain as much liquid as possible. In the process, of course, as Rajeev mentioned, as part of opening remark, we don't have a material exposure, even the CP market at this point in time, we have nearly INR 2,000 crores. We have good runway from liquidity as well as from maintaining cost of fund.

The next question is from the line of Sandeep Bapat from Hillhouse Capital.

On the 3 scenarios, the credit cost that you articulated, any further commentary on how you sort of thought about those credit costs would be helpful. Any assumptions that you've made or any commentary on that would be helpful.

Sandeep, it is premature. So the scenario plans -- this model will go through continuous run and rerun. Because in general, let me give you -- let's go to step one, right? As you already talked about, the bounce rate is high. If the digital payments are higher than 27% to 30%, the equation changes, if it's lower, the equation changes. See, we will have to just be data dependent at this point in time. As we are -- as I said earlier, we are -- we have increased engagement with the customers, given lots of them understood it to be waiver and so on and so forth. We may see lots of customers come back and pay digitally. We'll also wait, Sandeep, for a while.

Understood. And just a follow-up on that. The percentages that you gave, 50%, 60%, 80%, 90%, that's of 1 basis points or that's an absolute number in terms of increase in credit costs?

An absolute increase in credit costs.

Not in terms of percentage? It's absolute number.

Our -- if you'd see the 9 months, the run rate is around 175 basis points. So -- okay, do you mean that it's 80 basis points? No. But it'll end up being in that range.

No, what I mean is that the 80% higher, it's like 175 multiplied by 1.8.

Correct. That's the thought process. And as I said, it's right now based on the risk models that we're developing. Number could be...

Understood. And just in terms of AUM, I know you said that it's too early to say. But in the first and second scenarios, the AUM would increase year-on-year? Or you think there is just hard to say, too early?

In scenario one, clearly, it will grow -- should grow reasonably. I would say well, but should grow reasonably. In scenario two, also it will grow, but slower. Scenario three is really where the biggest challenge would be both on the demand side and on the credit cost side.

Understood. And then just one last follow-up. In terms of -- I know nobody really knows, but based on whatever you see on the ground, which scenario you think is the most -- like scenario two you think is likely or even scenario three is possible?

Sandeep, I'm not reading WhatsApp at all. And we are at -- we're all working from home. So you guys know better than I do. We are continuing to work from home 09:30 to 07:30 with no WhatsApp. So your guess will be better than mine probably.

We'll take that as the last question. I would now like to hand the conference back to Mr. Karan Singh for closing comments.

On behalf of JM Financial, I would like to thank Rajeev Jain and the senior management team of Bajaj Finance for joining us on the call today. Thank you all and stay safe.

Thank you. Thank you all for patient hearing. Thank you.

Thank you very much. On behalf of JM Financial, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.