Battle to Watch: Jio Fin vs Bajaj Fin

AT A RECENT press conference, Bajaj Finserv's charismatic CMD, Sanjiv Bajaj, issued a zesty ultimatum. He said that those seeking to avoid unsolicited calls from representatives of Bajaj Finance will soon have the "right to be forgotten," qualifying his remark thus, "… but then make sure, you never come back to us for your products and solutions."

But Bajaj's audacity isn't just bluster; it's backed by staggering numbers. Bajaj Finance is the undisputed heavyweight champ of non-bank lenders, boasting a jaw-dropping 73 million customer base. With a market capitalisation that bulldozes its nearest rival by a factor of five, a treasure trove of assets worth ₹2.7 lakh crore. Investors riding the Bajaj wave have enjoyed a compounded return rate of a stratospheric 42.8% over two decades. The fiscal year 2023 alone tells a tale of triumph, with 11.6 million new customers joining the Bajaj Finance fold. That's a record-breaking enrollment for a single year, achieved in a gladiator arena teeming with 14 diverse non-banking financial companies (NBFCs) — and that's not even counting the specialists in housing, microfinance, or gold loans.

Then comes a moment when Goliath confronts David. But the only twist here is a clash of titans — Goliath versus Goliath versus the Davids. The outcome of this battle could be anyone's guess, but one thing is certain — the clash will be intense.

Even as Bajaj Finance has emerged as the poster boy of non-banks, the entry of yet another conglomerate into the financial services business has got the industry and analysts on tenterhooks. Jio Financial Services' (JFS) debut is causing trepidation among players, given Reliance's financial heft and ability to decimate competition like it did in its core refining and petrochemicals business, followed by telecom. Spearheading the foray into financial services is a man who has been close to the Ambani family and played a key role in the amicable split between the brothers in 2005. While K.V. Kamath will be the chairman of Jio Financial, Hitesh Sethia, also a ICICI veteran, will steer the operations as CEO. Sethia, whose previous assignment was at McLaren Strategic Ventures as the head of its Europe operations, has over 20 years of experience and a track record of market development and business growth in Europe, Asia and North America.

With a record net worth of ₹1.20 lakh crore and leveraging the 18,446-store network of Reliance Stores and Reliance Jio's 448.5-million strong subscriber base, it's not surprising to see the Street value JFS — which has not even lent a rupee yet — at ₹1.34 lakh crore ($16.3 billion). In doing so, Jio Financial has emerged as the No. 2 non-bank in terms of market cap overtaking Cholamandalam Investment & Finance Company (over ₹92,000 crore), with Bajaj Finance sitting on top at ₹4.3 lakh crore.

Interestingly, despite the IL&FS crisis and the pandemic, non-banks have made a strong comeback — showing the highest credit growth (17.3%) in the past five years. What's more, net interest margin (NIM) has been trending higher owing to higher yields and lower opex costs. The cherry on top? A NIM on an upward curve, thanks to fat yields and trimmed operational expenses. Currently, NBFCs are enjoying margins that are a whopping 220 basis points higher than banks, sitting pretty at 5.4% versus banks' 3.2%. When you consider Bajaj Finance's price-to-book (P/B) ratio of 8.2x, towering over HDFC Bank's modest 3.2x, it's clear as day why the Street is as smitten about non-banks as it is about traditional banks.

At the recent earnings call of Bajaj Finance, when Prakhar Sharma, an analyst with Jefferies India, questioned the management on how it will counter the behemoth, MD Rajeev Jain replied, "I would work towards realising our ambition of 100 million consumers, and take a disproportionate share of these 100 million consumers' payments and financial services products and services, with a laser sharp focus." That confidence emanates from the fact that the company has managed a huge network effect with 72.98 million customers, on the back of the highest-ever quarterly increase of 3.84 million new customers in Q1FY24. A fund manager, who holds both Bajaj Finance and RIL in his portfolio, believes that while Reliance has the heft, the track record of conglomerates entering financial services has been far from impressive. "Be it Tata, Birla, Piramal or names from the South, none have managed to create scale in the way Bajaj has," says the manager.

While Citibank veteran Nanoo Pamnani, who helped Sanjiv build the financial services business, passed away in 2020, a majority of the core team has stuck around at Bajaj Finance for more than a decade, which analysts believe partially explains the reason for the business performance over that period. Also, it managed to create scale on the back of investments in distribution, technology and processes — the lender keeps track of over 1,850 KPIs (key performance indicators) across the app — to compete in the relatively low-ticket size but high-volume business. From a couple of products at the start of the journey, the company now has over 46 variant across 22 products lines and 73 million customers.

Even as Bajaj is looking to widen its moat, the other bigger players — banks — too, are getting better at the game. Rahul Jain, co-head, Asia financials and head, India research, Goldman Sachs, tells Fortune India, "Financial institutions are spending more to improve their digital properties, be it on the consumer interface side or on the analytics side. In that context, the larger banks and NBFCs have made a lot of progress. Anyone who is able to strike a value proposition between the two — online-offline commerce and lending — has a decent chance."

While a formal listing of the new entity is some months away, Suresh Ganapathy, analyst at Macquarie Capital Securities, believes JFS can be a real threat to NBFCs as well as fintech players. The competitive intensity in the consumer financing space will only increase as Reliance Digital would naturally also be one of Bajaj Finance's bigger customer acquisition channels. "So, an aggressive entry by JFS in this segment can potentially hurt Bajaj Finance's growth prospects. JFS not only can offer attractive rates in merchant lending and digital unsecured lending markets, but also can be reasonably competitive in the secured lending market eventually," says Ganapathy. Jain, though, believes heft is just one aspect of the inter-dynamics at play. "Consumer lending is getting more democratised. There are large banks willing to give loans and there are fintech players who have tied up with some larger lenders. In consumer financing, it's not just about capital, but also how you source customers and keep credit costs low," Jain tells Fortune India.

But the edge that Reliance brings overnight into the industry is what took years for NBFCs to create, and yet even market leader Bajaj Finance lacks the customer network that JFS will look to capitalise on. Savour this. If access to funds is one engine for growth, JFS has it by the truckload. Just its sheer net worth is ₹1.2 lakh crore, 2.21 times that of Bajaj Finance and 0.62 times of all the 11 diversified NBFCs' capital put together. When it comes to the parent, the conglomerate's debt rating is two notches higher than that of the sovereign. Bajaj Finance's cost of funds is 7.61%, while the interest rate on the bulk of RIL's FY23 bond borrowings is in the 2.5% to 6.25% range. More importantly, Reliance Retail has a strong presence in digital and new commerce channels led by AJio, a fashion and lifestyle destination store and JioMart, a cross-category horizontal platform that leverages the network stores and supply chain of Reliance Retail. Including Reliance Digital.in and Trends, the four digital channels, powered 19% (₹43,881 crore) of the FY23 retail revenues of ₹2.30 lakh crore. But here's the X factor that works in favour of JFS. As of March 2023, the retail business had 249 million customers, over 3x that of Bajaj Finance's total customer base and 100x that of the second-largest diversified non-bank Cholamandalam's 25 lakh. Top it up with the 448 million telecom subscribers, even if you consider an overlap of customers, the ready pool to exploit is humungous for JFS.

While the competition is for existing diversified NBFCs that are into insurance, broking, asset management and allied businesses, the immediate threat is for all the new-to-market fintech players, who have either partnered with big lenders on the consumer lending side or made a foray into financial services on their own. Further, the advent of the unique account aggregator (AA) ecosystem and partnership with "loan-service providers" (LSPs) have opened a big lending opportunity wherein AAs act as providers of financial data from various sources such as banks, mutual funds, insurance providers, and tax platforms. Based on the financial data, consumer and merchant-facing companies with large user bases can act as LSPs offering credit in partnership with banks and NBFCs, says a report by Credit Suisse. Here again, Ganapathy feels that given JFS' access to huge amounts of data, gathered from non-financial relationships, it can process and analyse this data in real time, and offer financial services similar to Alibaba, Amazon, Apple, Facebook, and Google. "Also, unlike other fintechs, JFS will have a large balance sheet, and eventually manufacture most products, giving it a significant competitive advantage," opines the analyst.

Even before it gets cracking on the lending business, JFS has partnered with the world's largest passive asset management firm BlackRock. Both companies are looking to invest $150 million each. Given that assets of passive funds have been on the rise, Jio Blackrock will look to create a sizable corpus under active management. Also, given that returns of the majority of active funds are far from impressive compared with passive funds, it will only make things easier for the new AMC. As expected, CEOs of AMCs are feeling queasy about the entry. "With the kind of capital they have deployed, and a low-cost model largely driven by a tech platform and existing customer pool, it will give them an edge over us earlier than most of the industry thinks," expresses the honcho of a bank-sponsored AMC.

In the past five years, the number of passive funds in India has grown from 90 in FY18 to 349 in FY23 with assets of ₹6.97 lakh crore. Further, passive funds saw record inflows of ₹1.55 lakh crore in FY23, on the back of 121 new launches. One of the factors for the growing popularity of these funds is lower cost and expense compared with actively managed funds. "All (AMCs) are getting into passive (funds) but none of us have the customer base and brand of Reliance. Also, as a bank-sponsored AMC, there are restrictions on how you can use the customer base between the fund house and the bank. Jio won't come with that baggage," explains the CEO.

But before established bank-sponsored AMCs feel that heat, it will be new entrants such as Navi Mutual Fund, which acquired Essel MF in 2021, that may have a fight on their hands. Of the total ₹3,222 crore AUM, Navi MF's Nifty index fund manages assets worth ₹800 crore and also has the cheapest expense ratio of 0.06%, compared with an average 0.19% charged by other AMCs.

While JFS has already sounded the bugle in the asset management business, all eyes will be on how it goes; how it builds its consumer lending business and leverages its merchant ecosystem. "Competition in consumer lending will remain high but commercial retail segments such as SMEs or, microfinance or commercial vehicles financing should see a decent loan demand," feels Jain of Goldman. Within consumer retail, secured loans, especially mortgage financing, is the domain of banks and more importantly offers very low yields. But when it comes to durables lending, JFS has the edge. More than 3 million merchants are engaged with Reliance's new commerce platforms. Besides, Reliance Digital, with over 500 stores, is the largest consumer electronics retailer in India. Ganapathy points out that Reliance Digital would also be a major contributor to Bajaj Finance's durable lending business and though it makes up for less than 10% of Bajaj's overall assets, the company heavily relies on this vertical as a customer acquisition engine to cross-sell personal loans.

Merchant financing will be yet another category ripe for disruption wherein fintechs such as Paytm have made significant inroads by tying up with private lenders. Through its JioMart network, Reliance claims to cater to 2 million merchants, who source FMCG items from Reliance Retail. Ganapathy mentions that Reliance Retail plans to scale up this network by 5x to 10 million over the next five years, making it comparable to large fintech platforms such as Paytm. Currently, Paytm caters to 30 million merchants and over the past four trailing quarters, it has disbursed merchant loans close to ₹45,000 crore. With a market cap of close to ₹50,000 crore, the country's poster boy of fintech will have a battle on its hands. JioMart already has a tie-up with B2B lending fintech ePayLater to offer a line of credit for all purchases at a lucrative rate, including interest free days, thereby providing easier access to working capital for small merchants.

Mukesh Ambani at the recent AGM of Reliance mentioned that in payments, JFS will consolidate its infrastructure with offerings for both consumers and merchants. "JFS products will not just compete with current industry benchmarks but also explore path-breaking features such as blockchain-based platforms and central bank digital currency (CBDC). They will adhere to the highest standards of security, regulatory norms and ensure protection of customer transaction data at all times," said Ambani.

In the days to come, as JFS and fintechs compete in some areas and collaborate in others, competition will only increase but, unlike telecom, which has become a largely saturated business with peak penetration levels, it's not the case with credit, insurance (just 4% penetration) and mutual funds (assets-to-GDP ratio is 16% vs the global average of 74%). JFS is expected to enter life, general and health insurance, using predictive data analytics to co-create contextual products. Analysts believe given the higher regulatory scrutiny and a strict licensing regime, the disruption that Jio could engineer in telecom cannot be extrapolated to financial services. "It will be tough for JFS to get a banking licence as the RBI has always maintained its aversion to corporates entering the banking business," says the fund manager mentioned earlier. However, if Niti Aayog's discussion paper on digital banks is any indication, it won't be too long before we see a conciliatory path being taken by the central bank with regards to a digital bank with the mandate to operate only in consumer credit and not corporate.

Jio's entry in financial services is coinciding with other developments — HDFC merging with HDFC Bank, Adani prioritising infra and renewables over financial services by selling the business to Bain Capital, Poonawalla Fincorp selling its home loan business to TPG Capital, and Shriram Group is in talks to exit its real estate business, and Aditya Birla Group selling its insurance broking business. Ambani has made his intentions very clear by stating at the AGM that, "Reliance has capitalised JFS with a net worth to create one of the world's highest capitalised financial service platforms at inception." In other words, JFS will not be the gladiator who wins battles, but will aspire to be the general who wins the war.