Jio Financial Services (JFS), a unit of Reliance Industries which was recently demerged, is set to create ripples in the financial services space in India, but how would it impact Bajaj Finance, the top non-banking finance company focused on the consumer lending space?
Recently Sanjiv Bajaj, chairman of Bajaj Finserv, the holding company for various financial services of the Bajaj Group, said the market is large enough and despite its huge size, the company still had less than 2% of India’s credit market. India needs ten more Bajaj Finances and ten more HDFC Banks, he said.
So, how do the two compare and what are the prospects for them ahead?
Bajaj Finance’s strengths
Bajaj Finance’s confidence stems from its substantial network effect, boasting 72.98 million customers, which it plans to take to 100 million. In Q1FY24 alone, the company added a record 3.84 million new customers, further solidifying its position. While Reliance possesses financial might, history shows that conglomerates entering financial services have struggled to match Bajaj’s scale.
The revenue of Bajaj Finance grew at a compound annual growth rate of 19.5% in the last five years, driven by growth across segments, including mortgages, home loans, SME loans, and rural financing.
Bajaj Finance, with a price-to-book (P/B) ratio of 8.2x, significantly outpaces HDFC Bank’s modest 3.2x, underscoring the market’s affinity for non-banking institutions.
Bajaj Finance’s core team has remained intact for over a decade. This stability partly accounts for the company’s outstanding performance over the years. Bajaj Finance has created scale through strategic investments in distribution, technology, and processes, meticulously tracking over 1,850 key performance indicators (KPIs) across its app. The company has expanded its product lines from a couple at the start to 46 variants across 22 product lines, serving a staggering 73 million customers.
Its consumer financing business has moved on from India’s top 100 cities which is where the major competition is and the expansion will continue. In the next three years, from 4,000 towns and cities, it plans to go to 5,000 towns and cities. It has 20 businesses and 47 products right now and plans to enter four-wheeler financing, tractor financing and micro-financing in the next two to three years.
The Jio Financial advantage
Jio Financial Services hasn’t started earning revenue from its core services. Hence, it is difficult to assess the company’s revenue growth.
Despite this, with a net worth of Rs 1.20 lakh crore and leveraging Reliance’s extensive network of 18,446 stores and a subscriber base of 448.5 million via Reliance Jio, JFS has already made a significant impact. Its market valuation, despite not having lent a rupee yet, stands at Rs 1.34 lakh crore ($16.3 billion), making JFS the second-largest non-bank entity by market capitalisation, surpassing Cholamandalam Investment & Finance Company (over Rs 92,000 crore). Bajaj Finance maintains its position as the leader with a market cap of Rs 4.3 lakh crore.
JFS brings an overnight advantage to the industry, a feat that took NBFCs years to accomplish. Even the market leader, Bajaj Finance, doesn’t possess the customer network that JFS intends to capitalize on. With a net worth of Rs 1.2 lakh crore, more than double that of Bajaj Finance, and a debt rating two notches higher than the sovereign, JFS is well-equipped with access to ample funds. Reliance Retail, with its extensive digital and new commerce channels, further enhances JFS’s capabilities. This conglomerate’s debt financing costs are notably lower than those of Bajaj Finance. Reliance Retail, with over 500 stores, stands as India’s largest consumer electronics retailer.
The competition extends to various sectors, from consumer lending to merchant financing. JFS is poised to make an impact in durables lending, given its extensive merchant network and the presence of Reliance Digital, a major contributor to Bajaj Finance’s durable lending business. The merchant financing segment, which includes fintech companies like Paytm, is ripe for disruption. With over 2 million merchants affiliated with Reliance’s new commerce platforms, JFS aims to scale this network by up to 10 million in the next five years.
JFS’s access to vast amounts of data, derived from non-financial relationships, positions it to process and analyze data in real time, potentially offering financial services comparable to industry giants like Alibaba, Amazon, Apple, Facebook, and Google. Additionally, JFS possesses a large balance sheet, granting it a significant competitive edge.
As JFS and fintech companies vie in some areas and collaborate in others, competition in the financial services sector is poised to intensify. Unlike the telecom industry, which has reached saturation levels, credit, insurance (with just a 4% penetration rate), and mutual funds (with an assets-to-GDP ratio of 16% versus the global average of 74%) offer ample room for growth. JFS is expected to expand into life, general, and health insurance, utilising predictive data analytics to co-create tailored products. While regulatory scrutiny and licensing restrictions may limit JFS’s expansion, the financial services landscape is evolving, and new avenues may emerge for digital banks focused on consumer credit.
How they compare
Bajaj Finance stands out as a sterling example among NBFCs, solidifying its position as one of the largest NBFCs with assets under management (AUM) totalling Rs 1,99,579 crore as of June 30, 2023.
The company boasts an extensive geographical footprint, operating from more than 3,800 offices nationwide, complemented by a robust distribution network counting over 1.6 million distributors.
Bajaj Finance continues to impress with its remarkable revenue and profit growth, outperforming Jio Financial Services in this regard. Additionally, it consistently rewards its shareholders with dividends and maintains a high Return on Equity (RoE).
In contrast, Jio Financial Services is still in its infancy, making it challenging to predict whether it can achieve the lofty expectations set for it. Furthermore, the company’s shares command a substantial premium compared to Bajaj Finance’s shares.
While Jio Financial Services harbours ambitious expansion plans, competing with established NBFC giants like Bajaj Finance poses a formidable challenge for newcomers in the sector.
Nevertheless, considering Reliance’s track record of success, it could carve a niche for itself in the financial services industry in the future.
