Like Bajaj Finance, Jio Financial has to come out with an innovative offering to make a difference in the market
Like Bajaj Finance, Jio Financial has to come out with an innovative offering to make a difference in the market. In addition, the business model has to diversify from exploiting group synergies (retail and telecom) to other retail products
- Updated May 04, 2023, 10:42 PM IST
Reliance Industries has the war chest, management bandwidth, ability to attract best talent from the market, management bandwidth and the Group synergies, but it won’t be easy for country’s largest private sector conglomerate in the cut-throat banking and financial services space.
This is what the industry veterans, who don’t want to be quoted, said about the newest BFSI entrant, which has already earned the reputation of creating a disruption in the market.
Reliance Industries Ltd, on Thursday, has taken the first step of creating a separate entity for financial services by taking the shareholders’ approval for demerger of the company’s financial services business -Reliance Strategic Ventures. This company will now be called Jio Financial Services.
The company, which is targeting the consumer and merchant lending space, has K V Kamath as the non-executive chairman to guide in formulating the long-term strategy.
The financial services business is a very broad-based business with multiple regulators spanning lending, advisory, insurance, both general and life, mutual fund, payments, distribution, and private equity etc. The financial sector, especially lending business, where Jio will be a player, is divided into two large constituents, which are banks and the non-banking finance companies (NBFCs).
Banking is a licensed business. Nearly a decade ago, the Reserve Bank of India (RBI) gave the last two full scale banking licence to Kolkata-based micro finance institution – Bandhan and infra-focused developmental financial institution –IDFC. Before this, Kotak and Yes Bank were granted licences in mid-2000s. The banking play for Jio Financial is still far away. In fact ,Reliance Group has a payments banking licence, but this differentiated banking licence restricts any lending activity. And even if RBI allows industrial houses in banking and Jio gets a banking licence, say 3-5 years down the line, banking is a diversified and competitive play from corporate loans, MSME, agri and retail loans.
Jio Financial is actually going to be an NBFC play initially. In the past, the industrial houses from Tatas, Aditya Birla, and even Reliance (unified) and later under Anil Ambani have had a presence in the NBFC space. But so far, there is no big disruption from the corporate houses. The lone exception could be Bajaj Finance, which has not only made a success in consumer durable financing, but also created a new market segment for the banks and NBFCs.
Like Bajaj Finance, Jio Financial has to come out with an innovative offering to make a difference in the market. In addition, the business model of Jio Financial has to diversify from exploiting group synergies (retail and telecom) to other retail products. There is also competition from the new NBFCs from the corporate houses like Piramals, Godrej and Poonawalla. Poonawalla has recently acquired Kolkata-based Magma Fincorp to scale up its presence. Similarly, Piramals acquired DHFL to create a retail portfolio of home loans to expand presence in the retail lending market.
There are also challenges in the NBFC sector as there is no regulatory arbitrage left. The regulations governing NBFCs are almost like banks in terms of NPA recognition or liquidity requirements. The diminishing regulatory arbitrage was one of the reasons for mortgage giant HDFC Ltd to merge itself with HDFC Bank.
There is also a big challenge on the funding side as NBFCs are not allowed to raise low-cost savings and current account deposits (CASA). The cost of funds matters in every retail product whether it is consumer durable, personal loans , cards or mortgages as banks with low-cost funds are also big players in these product categories.
There is also a threat of asset-liability mismatches. The debacle of infra financing IL&FS, which was an NBFC, happened because of asset -liability mismatches. So, the road ahead for Jio Financial will be challenging.
Published on: May 04, 2023, 7:18 PM IST