If one looks at the entire NBFC space, we have seen a lot of regulatory changes post the IL&FS crisis. Barring a handful, a lot of NBFCs have been facing rough weather. There are some NBFCs which are even now struggling to survive. What is the issue there? Is it because of the asset liability mismatch,? Is it because they were borrowing long and lending short?
There is very little difference between a large NBFC and a bank. It depends on what kind of a licence you can manage from RBI. That is something that Bajaj Finance has shown over the past decade. Earlier, NBFCs used to be monoline. They used to be geographically limited. There were a really small set of founders who wanted to do a little bit of local lending. But that has changed. Bajaj Finance has shown that opportunity and a few others have done it as well and that is why you can see that RBI has come out with some draft guidelines segregating large and other NBFCs as well bringing them under greater scrutiny.
So to me, it is less about NBFCs and banks. It is more about whether we have to take the penetration of financial services pan-India. We have to make sure this is available in an easy frictionless manner to customers. If it is to be available at very low effective cost and in a highly transparent manner, how does one go and build this? I believe the US has thousands of thousands of banks. Somebody was telling me recently that Sri Lanka has more banks than India. So forget NBFCs.
Whether it is an NBFC or a bank, the whole issue is we need many more lending entities and whatever name you want to call them with. What is also important is there is a learning time and learning curve that each of these entities will have to go through. You cannot just get into a lending business. You will get the growth but you will not get your money back. So you have to learn how to build risk models. You have to build a risk culture in the organisation. A risk culture is not about saying no. That is the easiest thing to do. Risk culture is about getting to know more and more about your borrower so that you are comfortable with the loan you are giving to the borrower. That takes time and hence I believe that we need many more banks.
We need to encourage people to start NBFCs. Instead I see NBFCs as a learning licence to a banking licence. You start up with an NBFC. You build it for a decade. If you do well on by and large all counts, you would have earned your right to get a bank licence if you want that. If you do not want that, you stay on as an NBFC.
Data is the new oil, at least of this decade. Bajaj Finance has demonstrated the advantage of data capabilities. Which way do you think this entire data and the data privacy issues would apply for NBFCs?
The data rules are currently under discussion and will get finalised soon. To me, as a basic principle, the control of personal data should lie with the individual. There will be some exceptions to this rule for national security and other things but that control should be there. However, in a country like India where almost half the population is illiterate and does not have access to financial services, the cost of going to them and providing them those financial services through the traditional branch route is not affordable. That is why even for those that say we do not need more banks, I ask them why half a million people are not getting service then?
The reason is that it is not a viable proposition. Technology, digitalisation and data can change that and what would be an interesting and important thing to do is to create a base KYC data set for the low-end of the pyramid for people that are by and large illiterate, which will be available only to sell a set of standard low-risk financial products that the regulators approve to this population. That will make it viable. That will mean that the government is willing to share a minimum amount of data with everyone but I believe that is democratic because that will lead to large scale financial inclusion.
Everybody who is literate — and there are ways to define that – -should have the right to decide what kind of data to share at least for financial products and other kinds of products. The other big discussion clearly is on data storage and security and this needs a larger and open discussion. A country of India’s size very clearly can mandate data localisation. But this needs to be debated so that it is done in the correct manner.
We know that with virtualisation of data, people are hacking into it all the time. It is less important where it is located. Though I must say because of the fact that we are going to be such consumers, we can economically set up data centres here. We would probably do cheaper than many other countries. I would bat for that. But the security around that needs a lot of thought and that is why on cyber security, we need to build intuitions. The industry and academia working together can innovate in this area because all this is still happening outside of India. We need to find our own way over here.
Governor Das yesterday referred to the fact that growth is back and a lot of NPA problems are behind us. But are they really behind us? What is your take on the NPA cycle? Are we nearing the bottom of the NPA pain?
Covid is an exceptional situation. But prior to Covid also, our economy had started slowing down and a large part of that was because credit was not available to the market and public sector banks were bleeding high NPAs and hence could not lend. With Covid, things got worse.
What we have seen through the Covid period is that smart private sector banks, large NBFCs went out to raise capital. People like us were fortunate that we went and raised capital 3-4 months before Covid struck. We like to plan in advance. In the last five-six months, lending by the private sector has started happening on the consumer side, SME side and some of the other projects. RBI has harmonised provisioning requirements for large NBFCs and banks and this helped to control risk in the system. There are still some small benefits that banks get on provisioning that NBFCs do not fully get, but I would not get into that level of detail over here.
Our problem has been with public sector banks. They have got some capital which is still not enough and that is why their ratios are still topsy-turvy. That does not allow many of them, especially the mid-sized ones or the small ones to continue to lend. That is what we need the government to do. I understand these things have to be done step by step after they have privatised a couple of the PSU banks. After deciding on the banks that they would like to hold on to, just let the rest go away. It will help build greater competition. It will help build a stronger banking system.
The last point I will say over here is that wherever we see the need for making Covid provisions, we have taken the entire lifetime provisioning on that loan in this current year so that we clean things out once and for all and start focusing on the future. I am not sure how many others have done this.
If one looks at the history of Indian financial sector in the last 10 years, both Bajaj Finance and Bajaj Finserv managed to make a complete mark. You have reached the size and scale at which the base effect would kick in. How will you ensure that last decade’s numbers are repeated in this decade for you?
This past decade has been kind to us. A significant amount of work was put in by our teams and with the support of our investors many of them who believed us when we were fraction of where we were today. But it has been a lot about disruptive innovation. It has been about identifying areas where demand outstood supply. It has been about building a culture of a high degree of empowerment and flexibility when we are innovating but with disciplined execution when we go ahead and build our businesses and all this on a very strong foundation of manufacturing and selling financial products across lending and protection. We distribute a little bit on the investment side.
As a result of this, across Bajaj Finance, we have now over 150 million customers nationally and we sell and service through a combination of offline and online channels. We enable all these partners through their own journeys.
Looking at the next decade, we have already started the process of strengthening our capabilities in the investment space. We have applied for a mutual fund licence and we will expand our activities there in the next three to five years. But more importantly, we continue to build on a phygital business model for our customers one that brings the best of the physical world with the digital world. This is for our customers, for our partners and for our employees which we hope will leverage both the worlds of today and tomorrow. It will provide customers with easier frictionless access. It will also provide them with instant service and a competitive set of products and solutions for a large part of their financial needs. They need to keep coming back to us rather than look anywhere else.
That is our desire for the next decade and there is a lot of work going in this area. I know the competition is heating up but we have built a very strong culture. More than that, as Bezos says we still come to work every day believing it is day one.