'We want to build best housing finance company of future'

'Opportunity is there in each segment of the market. There is opportunity in affordable and specifically governed by government initiatives as well as for housing for all.'

Sanjiv Bajaj, chairman and managing director, Bajaj Finserv, the holding company of Bajaj Finance, and Atul Jain, managing director, Bajaj Housing Finance, in a freewheeling conversation with Manojit Saha and Subrata Panda/Business Standard, outlined the company's growth plans beyond the IPO.

What next after Bajaj Housing Finance IPO? Any other subsidiary that you will look to list?

Bajaj: Firstly, this IPO is a combination of the high growth that we have seen in the housing finance arm and our desire to diversify the sources of capital as we continue to fund this growth, and also RBI's requirement as an upper-layer NBFC to list before September 2025.

As distinct from that, the two insurance companies are adequately capitalised.

And their growth is being more than met by the internal capital they generate. So, there are no plans right now.

The housing finance company is growing at a rapid pace. Is the regulator comfortable with the pace?

Jain: Regulation in our assessment does not come from growth only.

So far we never had a conversation with regulators where they have pointed out that we are growing very fast.

I think the way regulators look at things is that they look at capital adequacy, corporate governance processes, gross non-performing assets ratio, or whether you carry a systemic risk to the system overall or not.

Compared to the overall market size, growth percentage is also a question of relativity.

If you look from inception to now, it will look like our growth percentage is very high.

But from the overall market point of view, we remain very small.

So you yourself are also comfortable with this kind of growth?

Jain: Growth is a number; we do not choose a particular number.

So there is no point in saying that we have to grow at a certain number.

We believe, in a large market and if you are small, and you are an efficient company, there is space available, you take that space because you are hungry for business.

But there is no particular number we chase when it comes to growth.

Is the vision to be the next HDFC?

Bajaj: What we mean by that is that we have high respect for how HDFC built a business over the decades with excellence, focusing on the customer, a strong management team, and the next avatar of that is what we want to build.

Would you look to bring down your dependence on bank funding?

Jain: In that sense, we are fairly balanced, because 51 per cent of our funding is from the banks.

So we are not overly dependent on the banks. There are two large sources of funding--either you borrow more from the money market; or you borrow from the banks.

We believe we are fairly balanced from a funding perspective. Regulators have never specified a percentage; they always say diversify funding sources.

We believe the mix of what we carry is a fair reflection of diversification.

When we run a treasury strategy, there is an optimisation from the tenor point of view, from the cost point of view, also the variability point of view.

Money market funds tend to be fixed in nature as liabilities, while the bank funds tend to be variable in nature, since our asset size is more variable, because we lend at a variable rate.

So, there is an optimisation which we are constantly required to do.

And in our assessment, I think we have done a fair job in optimising the liability side mix.

Would you look at applying for a deposit-taking licence?

Jain: It's a licensing framework, we don't have it available today.

Bajaj: I don't think it's an option.

Jain: But if it is to become available, it opens up another source of funds. But we don't assume it is going to be.

What are your plans for the affordable housing segment?

Jain: We operate in all the segments today as well. The dominant portion of the book is non-affordable or the prime book, but there is a presence of the affordable book.

We have been gradually entering all the segments. Because each segment and each sub-segment of the business is a nuanced segment.

We need to grow it at a pace so that we understand.

Also, do it in a method which is advantageous to the customer, and to the company and see over a gradual period of time the performance of the book and then take it forward to a certain extent. That's what we are doing.

Opportunity is there in each segment of the market. There is opportunity in affordable and specifically governed by government initiatives as well as for housing for all.

But it's a nuanced business. Operational skills, processes and the technicalities of the business are different. So that's why we are gradually building it.

Would you look at a strategic investor after the IPO?

Bajaj: See, we have to dilute by 25 per cent in three years' time. And currently we are the strategic investor.

We will look at all types of investors and get a good mix of high-quality investors as we build the new company out.

There is a tremendous PE interest in housing finance companies. Did you receive any interest from the company?

Bajaj: Interest keeps coming. PE brings a valuable source of capital that is a medium-term source of capital.

But, we as promoters already bring that as a long-term source of capital. But there is nothing wrong with having high-quality investors.

Now as we move forward with the company, we will take a call.

Promoter stake dilution is 11 per cent. Do you have a roadmap on how you want to achieve minimum public shareholding?

Bajaj: No, it's too early to have that roadmap. It will be driven by the growth of the housing finance company and their requirement of capital.

And anything beyond that will be OFS that will come through Bajaj Finance, the parent to reach 25 per cent in 3 years' time.

What is your vision for Bajaj Housing Finance?

Bajaj: We want to build the best housing finance company of the future.

Do you have clarity on whether Bajaj Finserv or Bajaj Finance is eligible to apply for a banking licence?

Bajaj: Our understanding is, being a business group, we are not.

But the regulatory licence available to us currently gives us more than enough space to build high-quality businesses as we have demonstrated in the last 17 years with Bajaj Finance and 7 years with Bajaj Housing Finance.

How do you look at the competition, especially now that Jio Finance has entered the space?

Bajaj: We think the market is large enough for many players. And we are ourselves a product of that opportunity.

In the last 17 years as we have grown to be the largest consumer lender, it has not prevented anybody else from growing.

Why did you decide to trim the IPO size?

Bajaj: It is not cut down on the size. We had a window of a year to come out with the IPO, we just had kept some headroom.

Because as I said, part of the money is for their growth. Now, if it was 6 months later, we had gotten approval from Sebi then they would have grown for six months and some capital would have been consumed.

So, that few hundred crores was just the headroom. Jain: Offer for sale remains the same. It is the only minor reduction in the primary issue basis.

Can you give a roadmap on how you are looking to deploy the funds that you will raise?

Jain: So, the way we look at it is not the capital adequacy ratio. We look at it from the leverage point of view.

Our leverage ratio would be close to 6x today. Raising of capital would bring down that leverage ratio to a certain extent.

What we look at as a sustainable business practice is a 6x to 8x kind of leverage ratio, which is what we are governed by.

And if you look at our history also, that is where we had always been there. We always raised it as a rights issue from the parent whenever we crossed 6x or 7x leverage.

Of course, coming public means there is a bit of a longer headroom. Leverage ratio will come down. But if we continue to grow, I think it (capital) will get consumed.

And in some time, we will be back to our normal corridor of 6 to 8X leverage.

What is your plan for a developer finance book?

Within the developer finance business, there are various types of businesses.

We do not do construction finance business driven by pure returns. The first driver is the home loans.

Because it acts as a funnel for home loans as it gives you an entry point for home loans. Of course, returns are a welcome by-product.

So, there is a particular risk construct that we follow which determines the kind of yields we will have.

We try to be as conservative as possible. So, yields are not a driver of construction finance. So, we are not increasing the developer finance book from a yield perspective.

How do you see the valuation comparison among your peers?

Bajaj: So, we priced it keeping in mind what this size of business in the quality peer group has been, such that it is both rewarding for existing shareholders and for newer ones as well.

Would you have gone for listing so soon if not for the regulatory pressure?

Bajaj: So, we could have listed it anytime up to next year. Because one does not know how long it takes to get all the approvals.

But, now that approvals have come, we would rather list it now so that after this the management goes back into focusing on building the business.

What are your plans for Bajaj Finance's credit card business?

Bajaj: On our own we are not permitted to unless RBI gives us a licence. So, we can only do it with a bank.

We have two tie-ups with RBL Bank and DBS Bank.

Have you applied to RBI to have your own credit card?

Bajaj: Yes, we had applied sometime back itself. So, we are waiting to hear from them.

Feature Presentation: Aslam Hunani/Rediff.com