Bajaj Finance has just dropped its Q2 FY27 business update, and the numbers are turning heads. Assets under management (AUM) surged 26.5% year-on-year to Rs 5.85 lakh crore, adding a staggering Rs 37,800 crore in just three months. But here's the thing that's got analysts talking: while the money lent is growing faster than ever, the number of new loans booked rose only 11% to 1.35 crore. The customer base expanded to 12.89 crore from 11.06 crore a year ago, adding about 44 lakh customers in the quarter. When loan volume slows but the money lent accelerates, the average loan is getting bigger. That shift says a lot about how the company is growing, and it's the kind of signal a trained reader of financial data picks up in minutes.
The company hasn't released product-wise AUM for Q2 yet, but the Q1 FY27 numbers give us a clear picture of what's powering this engine. Mortgages are the heavyweight champion, growing 27% year-on-year to Rs 1.74 lakh crore and contributing roughly 35% of the total AUM growth. Urban personal loans, at Rs 1.10 lakh crore with 19% growth, added another 17% to the growth pie. Consumer finance segments—both urban and rural—chipped in about 12% combined, with rural consumer finance growing a blistering 49%. Investor Presentation +2
But the real story is in the new kids on the block. Gold loans exploded 112% to Rs 21,152 crore, now about 4% of total AUM, and contributed an estimated 11% of the growth. Microfinance, though still small at Rs 2,487 crore, grew 60%. Together, these newer businesses account for roughly 11-12% of AUM growth from just 4-5% of the portfolio. Established segments like mortgages, personal loans, and consumer finance still drive about 75-80% of growth, but the mix is shifting toward secured, lower-yield products like mortgages and gold loans. Transcript +2
Here's where it gets interesting. The customer franchise grew 16.5% year-on-year, but new loans booked grew only 11%. That gap tells us something important: loan volume is growing more slowly than the customer base. A growing share of customers aren't borrowing in any given quarter, or they're borrowing less often. Part of this is statistical—the festive season started early last year, making comparisons tricky. But there's a deeper trend at play.
In Q1, existing customers accounted for 68.4% of new loans, up from 65.2% a year ago. The company added 5.10 million new customers in Q1 against 16.13 million loans booked. If each new customer took one loan, about two-thirds of loans went to existing customers. This pattern likely continued into Q2. Growth is leaning heavily on repeat and cross-sell borrowing from the existing base. The cross-sell franchise stands at 79.22 million, a massive pool of customers the company can tap again and again. Investor Presentation +1
Deposits stood at Rs 69,750 crore at the end of Q2, barely moving from Rs 68,500 crore in Q1. That's only about Rs 1,250 crore of sequential growth, or roughly 3% of the Rs 37,800 crore AUM added in the quarter. At about 12% of AUM, deposits are significant but clearly not the primary growth engine. So what's going on? Transcript
The causal relationship here isn't straightforward. Deposits don't directly "drive" lending capacity in the way a bank's deposits might. Instead, they provide stable, diversified funding that helps manage liquidity and overall cost of funds. The real growth engine is market borrowings—commercial paper, NCDs, and bank lines—which make up about 48% of the funding mix. Deposits are more of a cushion, giving the company flexibility and reducing reliance on volatile wholesale markets. The planned Rs 17,500 crore capital raise through a QIP and promoter warrants will add equity capital to support growth, but deposits themselves are playing a supporting role, not the lead. Investor Presentation
Motilal Oswal expects net interest margin (NIM) to decline by about 10 basis points sequentially to around 9.4% in Q2. The culprit? Rising borrowing costs and bond yields. The company's cost of funds in Q1 was 7.46%, and management flagged that incremental borrowing costs have risen roughly 30-60 bps in the market. With about 48% of funding coming from money markets, the company is sensitive to yield movements. Transcript +1
But here's the rub: the yield on existing loans stays largely fixed in the short run. Only new borrowings and loans that reprice carry the higher rates. This timing lag squeezes spreads until the loan book catches up. Management expects NIM to moderate by 10-15 bps going forward, though they asked investors to wait one more quarter before treating that as firm guidance. Transcript
Pricing power varies wildly across segments. Consumer durables and personal loans—short tenor, unsecured—can reprice quickly. Customers focus on EMI rather than rate, so the company has more room to pass on costs. Mortgages, the largest segment, are a different story. Customers compare rates closely, competition from banks is intense, and existing loans may be floating. This segment has much less pricing power. Gold loans and loan against securities fall somewhere in the middle—short tenors allow quick repricing, but competition is high.
Despite rapid loan growth, brokerages like Motilal Oswal, Nomura, and PL Capital expect credit costs to remain broadly stable around 1.55-1.6% of AUM. How is this possible when the company is expanding into riskier segments like gold loans and microfinance?
The answer lies in the Q1 numbers. Loan loss to average AUF was 1.54%, down from 1.87% a year earlier. Excluding a Rs 296 crore management and macro overlay, it was just 1.31%. Stage 2 and Stage 3 assets fell to 1.87% of loans from 1.94% in the prior quarter. Vintage performance at 3, 6, and 9 months is better than pre-COVID benchmarks. The company is also holding provision coverage at 60% structurally, with 187 bps coverage on Stage 1 and 2 assets. Investor Presentation +2
Nomura's projection of a 7 basis point sequential moderation in credit costs likely hinges on the overlay behavior. The Rs 296 crore overlay added about 23 bps to Q1 credit costs. If management doesn't add to it or releases part of it, credit costs can ease even with unchanged underlying asset quality. The CEO said he'd assess it quarter by quarter. Transcript
Newer segments are being managed carefully. Gold loans have early warning signs but remain mild—Stage 2 rose to 0.69% from 0.50%, and 30+ DPD is around 0.31-0.33%. Microfinance is tiny at 0.5% of AUM, so even sharp stress wouldn't move the consolidated needle much. The company tracks bureau data against industry thresholds and intends to stay at low levels. Investor Presentation +3
Brokerages expect net interest income (NII) to grow 24% year-on-year to Rs 13,373 crore, but net profit to jump 29% to Rs 6,383 crore. That 5-percentage-point gap has to come from costs falling as a share of income and loan losses growing much more slowly than income.
Q1 showed exactly this pattern. NII grew 23%, but loan losses and provisions rose only 1%, lifting profit growth to 28%. Pre-provision operating profit (PPOP) grew 22%, but with provisions barely moving, profit before tax surged 28%. Operating leverage wasn't the driver—opex actually grew slightly faster than income in Q1, pushing the opex to net total income ratio to 33.4% from 33.1%. Management guides to a 25-40 bps improvement in this ratio for FY27, which should kick in as gold loan and microfinance branches mature. Investor Presentation +3
There's a delicate balance here. Aggressive AUM growth, especially in lower-yield secured products like mortgages, dilutes NIM. Higher funding costs squeeze margins further. But if credit costs stay low and operating efficiency improves, profit can still outpace loan growth. The planned Rs 17,500 crore equity raise adds capital to support growth but dilutes ROE slightly in the near term.
Feedback loops are everywhere. Lower credit costs lift profit and retained earnings, supporting faster AUM growth. But if that growth leans on unsecured segments, future provisioning needs rise. Higher funding costs push the company toward higher-yield unsecured loans, which carry higher credit costs. The Rs 296 crore overlay is a buffer management can release to cushion profit if margins fall, but it's a lever, not a plan. Transcript
As Bajaj Finance announces its full Q2 results, all eyes will be on the actual NIM against Motilal Oswal's 9.4% projection, credit cost trends, and whether the opex improvement is materializing. The 26.5% AUM growth is impressive, but the real story is whether the company can convert that growing loan book into sustainable earnings without compromising lending standards.
