Bajaj Finance to shrink lending to reckless borrowers

Bajaj Finance Ltd is limiting exposure to over-leveraged borrowers to protect credit quality, as risks rise in India's unsecured lending market.

The non-bank lender plans to halve the share of new loans to customers with three or more lending relationships to 3.5% by March 2027 amid concerns indebtedness and repayment capacity of unsecured borrowers, managing director Rajeev Jain said. The company has already reduced the share of such customers in loan originations to 7% from 14% earlier, managing director Rajeev Jain said.

“Three personal loans is a single univariate metric that continues to trouble us. We have brought that down from 14% to 7% in terms of origination. My mandate to the team is to bring that down to 3.5% in six months' time,” Jain said at Bajaj Finance's second-quarter earnings call on Monday.

Bajaj Finance is particularly watchful of unsecured borrowers, including self-employed customers who could face pressure from higher oil prices and inflation. The company has stress-tested its unsecured, non-salaried portfolios and created additional provisions against potential deterioration in repayment capacity.

“That is really where we are principally headed…I am looking at ultra-low credit metrics because we have seen that a customer who has multiple pieces of points of leverage has a higher probability tendency to flow into default,” he said.

During the quarter, Bajaj Finance made a macro-economic provision of ₹337 crore, taking its loan losses and provisions to ₹2,166 crore for the quarter, up from ₹2,080 crore a year ago. Had it not been for this prudent measure, its loan losses and provisions would decline by 12% on year to ₹1,829 crore.

Rise in provisions also reflected the deterioration in asset quality, with its stage 2 and 3 assets rising by ₹1,601 crore in Q2, including a ₹1,047 crore increase in the gold loan business due to short-tenor schemes that are no longer being offered in response to regulatory changes, according to the company’s investor presentation. Including this, the company’s stage 2 and 3 assets were 2.02% of loans as of September end from 1.87% a quarter ago. Stage 2 loans are those where credit risk has increased but are not in default, while Stage 3 loans are already non-performing.

“The company does not expect impact on its credit cost from this transitional increase in gold loan stage 2,” the presentation said. However, adjusted for transient movement in gold loans, stage 2 and 3 assets improved to 1.88% of loans from 1.90% in Q1.

After a rise in its stage 2 assets, which indicate an increase in credit risk before a loan becomes non-performing, Bajaj Finance is changing its gold-loan strategy.

Jain said short-tenure loans requiring customers to visit branches every three months for repayment or rollover could inadvertently push them into delinquency. The company stopped offering such schemes in August and plans to focus on longer-tenure products, while allowing customers to continue with bullet repayment or opt for periodic interest payments.

“A short-term loan doesn’t work for the customer, doesn’t work for the company, and is not sustainable,” Jain said, adding that the lender was willing to accept slower growth rather than compromise on customer interest.

Assets under management grew 26% on year to ₹5.84 trillion. On a consolidated basis, AUM of gold loans rose the most–by more than twofold on year to ₹24,195 crore, followed by commercial vehicle and tractor finance business rising by 89% on year to ₹5,044 crore.

In terms of outstanding numbers, mortgages contributed the most to the overall AUM to ₹1.87 trillion, up 30% YoY and urban personal loans grew 19% to ₹1.15 trillion. MSME lending was up 3% to ₹53,084 crore. The management expects to grow its AUM by 23-25% on year for FY27.

The company is also seeking to strengthen its balance sheet through a proposed ₹17,500 crore capital raise, comprising a ₹11,700 crore qualified institutional placement and ₹5,800 crore in preferential warrants from promoter Bajaj Finserv, subject to approvals. The capital is intended to support growth and improve resilience as the company targets a balance sheet of about ₹11 trillion by FY30.

Bajaj Finance reported a 29% on-year increase in consolidated net profit to ₹6,367 crore in the September quarter, while net interest income rose 24% to ₹13,335 crore.

However, margins could face further pressure in the second half as borrowing costs rise. Jain said the company was factoring in two further rate increases during the current year and expected some additional compression beyond its earlier full-year guidance of 10-15 basis points.

The lender expects to offset part of the pressure through operating efficiencies and lower credit costs, while retaining its long-term target of 20-25% annual profit growth.

Subhana Shaikh is a business journalist at Mint, where she covers the Reserve Bank of India, monetary policy, and India’s bond markets. She has seven years of experience in reporting on financial markets, with a focus on banking and the broader financial system.<br><br>She began her career after completing her postgraduate diploma at the Indian Institute of Journalism and New Media, Bengaluru. She then spent five years at Informist Media, a news wire agency, where she closely tracked bond markets and the BFSI sector, developing a strong foundation in market reporting. She later moved to NDTV Profit, where she expanded her coverage across a wide range of business and economic stories.<br><br>At Mint, Subhana focuses on explaining central bank decisions, bond market movements, and banking trends for her readers. Her reporting combines on-ground inputs with careful analysis to help audiences understand complex financial developments.<br><br>Based in Mumbai, she is interested in exploring stories across the business landscape. Outside of work, she enjoys reading and spending time with her three cats.

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