Some analysts have criticized Bajaj Finance Ltd for converting some of its term loans to flexible loans, as this comes at a time of financial stress and loan moratoriums.

The company, India’s largest non-bank lender, revealed the conversion at its annual general meeting on Tuesday. Under flexible loans, borrowers are usually allowed to defer principal payments for a period of time, for which the lender charges a higher fee or interest. These products are quite common. However, the conversion raised concerns about the quality of assets due to its timing. According to the first quarter results released this week, Bajaj Finance converted ??8,600 crore from term loans to flexible loans with a switch fee, allowing customers to pay only interest for a predetermined period.

“The question is whether this product amounts to a quasi-restructuring and how the ??3,600 crore of loans currently under moratorium will be processed once converted to flexi loan. While the company claims that almost 25% of the loan portfolio were flexi loans before covid, it is questionable whether the company is raising the risk curve for profitability in these difficult times. Therefore, do we understand the risk correctly? “Said an analyst at a foreign brokerage firm on condition of anonymity.

The management of Bajaj Finance, however, clarified that it had been offering flexible loans for five years. As of March 31, the lender had existing flexi loans of ??36,846 crores. “In the first quarter, we were delivering the loan product to customers with no late payments and a good repayment history. Of ??8,600 crore of switched loan, ??5,000 crore was given to non-moratorium customers and ??3,600 crore under moratorium. It is important that customers start making monthly payments again, ”Rajeev Jain, Managing Director and CEO of Bajaj Finance.

The Flexi loans which constituted ??8,600 crore this quarter constitutes 6.2% of total assets under management. Of this total, 2.6% are under moratorium. At the end of the first quarter, the sustainable consumption financier saw its portfolio of loans under moratorium reduce to 15.7% of total assets under management against 27.1% as of April 30. The book of the consolidated moratorium amounts to ??21,705 crores as of June 30. “We believe these loans are in the normal course of business, comparable to other EMI or Interest Only / Working Capital Demand (WCDL) loans. An increase in this ease of ??8,600 in the first quarter, it is undoubtedly high but even if we add the flexi borrowers under moratorium of ??3,600 crore, the moratorium ratio increases to 18%, ”said a report from Kotak Institutional Equities.

According to a memo from Edelweiss Securities, this product reduces EMI load by almost 50%, which will help clients in these difficult times. “Is there any uncertainty about these products – to some extent, yes, but then it was a need of the hour and anyway the company has over five years of experience in the handling of this product, ”he said.

Management has also stated that only clients with a good credit history are eligible for this loan and therefore there are no concerns about the quality of the assets.

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