 "While banking is a big challenge, it will be easier for us: Sanjiv Bajaj")
Sanjiv Bajaj, managing director of Bajaj Finserv, says there is a need for new "hungry guys" to come in to cater to the needs of so many unbanked people. He speaks to Clifford Alvares on his banking strategy. Edited excerpts:
There are over 7,000 banks in the US---there are niche banks, community banks and internet banks. In India, we have only followed the universal banking model. Given the tremendous opportunity in India as an economy through the next 50 years and more, there’s significant lack of penetration in banking. If you see, today, the top banks are making money only in the top 30-40 cities. Some people may only want to deal with a bank online. The operating costs of such will be so low that it will provide tremendous value to customers. But it will also be limited in size, because there are only so many millions who will do internet banking alone. So, such innovations are required.
Look at the information technology revolution; it grew on its own legs and created a lot of entrepreneurs. There are many companies that make apps, software and games that are doing very well. I think over the next twenty years, you are going to see tremendous innovation in banking. We need that innovation. There were many banks before ICICI and HDFC. But look at the convenience of banking now after they have come. So, balanced competition is what drives innovation. When say there are lot of un-banked people, you need new, hungry guys to come.
Many non-banking financial companies (NBFCs) have chosen to remain niche in their own space because of simpler regulations, as opposed to banks with stiffer provisioning requirements. Is it not better to remain an NBFC?
If you are a mono-line player, it makes more sense to remain an NBFC. As you said, there are simpler regulations; so, you can keep doing that small thing really well. Gold loan companies are niche, but to me they’re niche banks. Their limitation is beyond a point, they will not be able to grow, but they can be very good in their own area and grow within that space.
Consciously, the strategy we built was to have a diversified lending business. We focus on cross-selling to millions of customers and grow our business. Down the line, as an NBFC, I don’t have access to funds on the liability side. We know if we build the right customer segments, we will be able to build a retail side. We don’t know when we will become a bank, whether now or after five years. We have the right set of customers with us. We know cross-selling is the right thing to do if you want to increase your returns on equity. We know as a bank, we have to conservatively provide for loan loss. So, we are making provisions like a bank. While it’s still a big challenge, if we are to convert to a bank, it will be relatively easier for us.
Raising deposits is the toughest part of being a bank. A lot of banks are still struggling in this area.
It’s not the toughest, but it will take some time to build it up, if you have the patience to build it over years. You can’t buy customer loyalty by giving higher interest; it will come through transparency, which will come through our millions of customers who are working through Bajaj Finance. Hopefully, we will take it to a meaningful size in time. These are long-term businesses and will take time.
What is your strategy for the banking business?
It’s too early to talk about our strategy. We have applied through Bajaj Finance, which will be the promoter, and we will form a 100 per cent holding company here as per the rules laid down by RBI. Bajaj Finance is a diversified company and will come under this structure. We will be able to significantly launch our banking business within the stipulated time of 18 months.
There are so many players in the banking space. Also, there will be competition from NBFCs and other para-banking players. What will drive banking growth in India?
In the last few years, especially after the financial crisis, there has been so much tightening in regulation and lending practices that we are not seeing significant amount of innovation in the banking space. If you don’t keep pushing, we will get into a situation in which you will perform according to averages. We do have a significant business that can be transferred into a bank. But for those that start from scratch, my thinking is they will need a differentiated strategy; otherwise, they will only act to drive down prices. The Reserve Bank of India has talked about niche licences; there are opportunities. In the US, there are regional banks, online banks and others that focus only on few channels. This will require a change in the guidelines, but this will only help strengthen the banking sector. I believe you cannot start a bank overnight. It requires a lot of patience and nurturing. Some of the biggest banking institutions were built over a long period of time.
Consumer durable financing has been a key growth area for you. What was your strategy here? What were the other growth drivers for Bajaj Finance?
In 2007, we probably accounted for less than one per cent of the consumer durables sold in the country. We also saw buying consumer durables was a family experience. So, we asked how we could keep the thrill of buying consistent, if the loan process was too long. We built a process through which we brought down the loan-processing period to two hours and, eventually, to three minutes. Now, it’s all automated---with our plastic card, we know about a customer’s credit, and he can immediately take that product home. We created an entire ecosystem of 4,000 stores, where the average ticket size is less than Rs 27,000. If you talk to other banks, they will say you can’t make money because the operating cost in consumer durables is so high. We have reached a meaningful size and we account for 15 per cent of the total consumer durables sold in the country. We also make a good margin. Customers get zero per cent loans instantly because we have tied up with manufacturers.
So, it is about identifying opportunities, not many, but a few, and creating value differentiation that can affect customers. We balance all our business segments. The consumer is profitable, but we also know the risk can be higher. Small and medium enterprises are a very stable part, though the margins are lower. But it will keep us growing at lower margins. There is a very significant cross-sell element, which adds to our income. This is how better banks function globally.