Bajaj Finance, India’s largest NBFC, disclosed that it will be converting a part of its term loans to flexi-loans. Customers can opt for this conversion by paying a fee. In a flexi loan, the borrowers are exempted from paying the principal for a predetermined period. In that period, they only have to pay the interest.
The interest rate charged for this period is usually high. Flexi-loans are extremely common.
Flexi-loans: Why Are They Being Criticised?
Many analysts have criticized Bajaj for this conversion keeping in mind the financial stress and liquidity crunch caused by the COVID-19 pandemic. Moreover, people can always opt for the extended moratorium allowed by the RBI, which makes flexi loans unnecessary.
Bajaj Finance, as stated by the reports of the first quarter, has already converted Rs. 8600 crore of term loans into flexi loans. 25% of the loans were already converted to flexi-loans before the lockdown was declared.
The question is about how the Rs. 3600 crore worth of loans that are under moratorium should be treated once they are converted to flexi-loans. While flexi loans are profitable for both the customers and the company, it also increases the risk. Therefore, there is a need for both parties to understand the possible risk.
As stated by Rajeev Jain, MD & CEO, Bajaj Finance, the company has been giving out flexi loans for the last five years and had considerable experience. It currently has flexi loans worth around Rs. 37000 crores. The company offers loans with no overdue and keeps a strict repayment track record, so as to minimize risk.
In this quarter, the flexi loans are worth Rs. 8600 crores and constitute 6.2% of the total assets under management. 2.6% of these loans are under moratorium. The total moratorium of this quarter stands at Rs. 21000 crores, about 15.7% of the total assets under management.
Bajaj assured that it only offers flexi-loans to customers with a good credit history and there was thus a negligible risk of bad loans. Moreover, as stated by Edelweiss Securities, these loans reduce the repayment burden for the customers by nearly 50%. Therefore, these are necessary even when there is a slight risk.