Very true . I too observed this that retail borrowers are more diligent . But isn’t it surprising that retail investors pay back the loan while theres lot of risk in corporate loan default ( which is reason why I guess bandhan bank founder Ghosh also said in some interview that micro finance was never an issue but they defaulted when they ventured into corporate lending with il&fs which they said they wouldn’t do again) but shouldn’t it be the other way round ideally as capacity of retail lenders is weak as compared to corporate borrowers . Isnt it counterintuitive? I mean Is there some behavioural thing at work here ?
Yes , it cleared my doubts . Thanks so much for detailed revert
Yes, capacity of retail borrowers is low and that is why they are sanctioned loans according to their capacity, looking at their salary, job stability etc. Companies are also sanctioned loans according to their turnovers, profitability, execution consistency, industry nature & condition etc. But, still companies are more likelier to default because they face more uncertainties in their endeavor, owing to numerous moving parts, compared to an individual.
Behavioral thing is also at work, because if the credit history takes a hit owing to a recent default, the individual is highly unlikely to get another loan after a short while. It will take a long time for him to repair the history. Companies on the other hand have shrewd management who can put together a plausible story as a reason for default and convince the lending organizations for extensions or rollover loan. Nevertheless, a company has many avenues for raising money and also has more connections than an individual can muster. So, it is highly prudent for an individual to service a loan for his own good.
If you borrow 50k-1Lakh from a bank, it’s your problem. However, if you borrow 50-100cr from the bank then it’s the bank’s problem. Even though Some banks can successfully lend to corporates as well but they are very few banks who have successfully kept their book quality while giving out corporate loans. Some like Cub have specialised in lending to Msme’s and small corporates. Markets have rewarded them handsomely, due to continuity in culture, management and focusing on one segment.
It doesn’t make perfect sense for Bajaj Finance to spend 150 crores on RBL bank, merely because of co branding. However since 150 crores is only 1.75% of the QIP of 8500 crores that Bajaj Finance is doing, Iwouldn’t be much worried. The main worry about Bajaj Finance is how they show such low NPA figures in unsecured lending, whereas lenders like DCB Bank who specialise in secured lending and concentrate on retail show 2% NPA.
I wonder how much is due to evergreening of loans or selling of loans to ARCs which BFL is surreptitiously doing!
Pls Correct me if I am wrong But evergreening or restructuring, wouldn’t it be more probable where the loan book is wholesale rather than retail ? Heard of corporate loan restructuring but haven’t ever heard of consumer or retail loans restructured .
Interesting point, even if they are doing it, the expected haircut would be shown somewhere i suppose…written off or in provisions and ultimately taken away from profits reported. So if they are doing this, they seem to do well. Pls correct if wrong. Also, is doing this on a regular basis a good or neutral thing or any red flag on the company? (Other than of course showing that their underwriting is not spectacularly different from other good players) Thanks.
How can retail loans which are small ticket in size be sold to Arc? I call this post BS, without any basis. Please give facts, don’t just post statements.
It appears that you have invested in a large number of companies and hence neither reading annual reports or listening to con calls. Selling off loans is never a good thing. See my post on Oct 2, giving a summary of the latest annual report, regarding ever greening of loans. In the latest con call Rajeev Jain informed about selling of loans to Asset Reconstruction companies. I can see the smoke but unable to locate the .
This is not much considering the size of the business.
Service tax dues of ₹1340 crores is under dispute out of which only 10 crore has been paid.
There are many companies where such disputes are pending… and cases can go on for long time without resolution. Even if case goes against the company, its just 1 time impact.
Auditor has noted that Impairment of financial assets and provisions are management estimates and could differ from actual.
Auditors can not predict the future and under IndAS, the provisions are made on Excepted Credit Losses. Say, management as per its experience, says, in a consumer loan which is not repaying anything, management expects to recover 50% amount… provisions are required for rest 50% only and not on 100%. So management estimate is always there…
ECL stage 3 loans can be renegotiated and brought under ECL 1 or 2 provided renegotiated principal and interest are being repaid on time. 0.5% provision is made for stage 1 loan, while provision is to the extent of 20% and 50% for stage 2 & 3 loans.
If renegotiated loans are being repaid on time, this is not evergreening. In evergreening, the bank provides loan to a holding company (of defaulter), which comes to the defaulting company and paid back to the bank. The bank charges some fee-based income on these new loans,… Under renegotiation, the term may be increased and emi reduced to help recover loans…
Major mutual fund shareholders regularly purchase and sell shares.
I dont think this is a negative…
Rajeev Jain sold the shares received by him under ESOP immediately…
It is true from begining… and Mr Rajiv is very vocal about this… this selling of ESOPs helps him think independently without bias. Consider, Bajaj Finserv… they have maintained their stake at 55% around… even after all the QIPs, Fund raises and ESOPs etc.
None of these are red flags. You’re entitled to your opinion. Happy investing. Investing in 18-20 cos isn’t too much rather I am trying to save myself from my own arrogance in the beginning. I don’t think theres too much smoke as you’re mentioning. Maybe I am wrong but only time will tell. Can’t see the same red flags. These are normal points in the operations of any lending business. Read about HDFC bank on smartkarma in that scenario if you call these reg flags. 1 crore to auditor for a company worth 2.4 Lakh crore. Maybe I am wrong, but this is not a red flag. Mutual fund shareholders buying and selling shares as a red flag. Never buy HDFC bank or any other company in that scenario. Give me the percentage of loans being sold to Arc. Then your arguement might hold valid
For your convenience
Posting this
Concall- please tell me the % of loan book
Write-off is referred in the presentation on Panel 40 ,if you see the write-off, it represents
the last five quarters of write-off. September’18 was Rs.150 Crores, December’18 is Rs.285
Crores, Mar’19 to Rs.270 Crores, Jun’19 to Rs.196 Crores and Sep’19 to Rs.293 Crores so
it continues to move between Rs.275 Crores - Rs.280 Crores . A smaller part of the write-
off is actual write-off. We generally sell down the portfolio based on the NPV of the
portfolio as to rather than recovering from it, we would rather sell down to an asset
reconstruction company and so as you can see on Panel 40, there is a Rs.13 Crores of
recovery from realization on sale of NPA and has been entirely realized here.
I had previously thought that those who are investing in this high PE stock are dumb. But we seem to have plenty of smart investors here. Not all of my remarks are red flags. They are merely observations. Thanks for your clarifications.
There is a recession going on which is likely to continue for another 9 to 12 months. The stock being a financial stock is selling in the 50 PEs
and at more than 10 times book. Surely selling unsecured loans at less than 2% NPA is either a matter of wonder for bulls or horror for bears.
Disclosure: Not invested now.
Post the Kary Fiasco, the word is Bajaj Finance is recalling its LAS loan book.
Anyone has any idea is this is true?
In fact many NBFCs seems to be doing this. Can’t verify this though.
Do update if anyone can dig something about this.
LAS might be forming significant amount of their Loan Book.
it is true that the stock is expensive if you look at price to book value… but the other side of the coin is, for a financial company, it gives access to low cost capital. They can sell 1 Re share at 10 Rs… which after this QIP / any other fund raise… leads to significant increase in book value per share and consequently p/b ratios…
For 50 PE, consider after tax benefit, there will be an increase of 16% PAT every year… so its basically, without growth, 44 pe historical… if company grows at 25-30% every year…
For tax benefit, simply saying 44 pe is also not enough… since 16% is about 1100 cr per year (based on ttm profit of 6900 cr)… they last raised funds about 2 years back… so in 2 years about 2300 cr saved… now fund raise was 8500 cr… so if in theory, this tax rate was cut 2 years ago, there would have been around 30% less dilution today…
so for a company, specially financials, where capital requirements are high… cascading effects of tax cut are positive… so in PEG terms… paying 1.2-1.5 PEG is not very expensive…
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