Rationale behind Bajaj Finance’s Success

Bajaj Finance has positioned itself as a cash cow with impressive moats. Bajaj Finance with an average RoE of 20% has seen its loan book rise at a CAGR of 35%, and its Profit After Tax has grown at a CAGR of 33% for over ten years. Despite such a meteoric rise in its numbers, Bajaj Finance shows no signs of slowing down as the company reported a 159% increase in profits YoY for Q1FY23.

Let’s first understand the the firm’s business model,

As the country’s largest consumer durables financier, it provides 0% EMI with a minimal processing fee to the consumer. When the consumer opts for the EMI, Bajaj Finance pays the full amount of the product to the manufacturer. Since, the manufacturer is getting the whole amount in one transaction, the manufacturer provides a 3-6% rebate to Bajaj Finance. Then, Bajaj Finance recovers the full amount of the product excluding the rebate from the consumer.

In this deal, all three parties included in the transaction benefit from it. The consumer gets the comfort of paying monthly installment for the product at zero percent interest rate. The manufacturer receives the full amount of the product which increases the inventory turnover for them. Bajaj Finance earns through the processing fee as well as the rebate provided by the parties involved.

These consumer durable transactions provide customer data to Bajaj Finance and after analyzing the repayment habits and customer background, Bajaj Finance pushes higher cost products to non-delinquent customers. Thus, creating a financing ecosystem with a trustworthy customer base.

 

Why cannot others enter Bajaj Finance’s niche segment or replicate its success?

Bajaj Finance enjoys the privilege of borrowing vast sums of money at low rates due to the backing of the Bajaj Group. Along with that, Bajaj Finance has always focused on its Asset Liability Management. To elaborate further, Bajaj Finance borrows vast sums of money at low rates and lends the money to customers for a short period. This is one of the key factors attributing to the stability of the firm. 

Bajaj Finance has already established itself as a financier with an extensive network and an efficient collection method that is difficult to replicate and even more difficult to snatch Bajaj Finance market share of around 70% in the consumer durables financing segment.

What does the future hold?

Bajaj Finance is focused on creating a robust profitability engine on the backs of its digital infrastructure, i.e., its app.  With more of the society shifting towards the digital world, the firm has deemed the utmost importance to possessing an online infrastructure. The app allows the firm to carry out more deals with a smaller cost of acquisition as the customer base expands. The app includes an investments and brokerage dimension that opens up new avenues of income for the firm. The app has garnered over 10 millions downloads on Google Play Store alone and presently is ranked 7th in free finance apps in India as per 26th August, 2022.