Bajaj Finance Recovery Hopes Hinges On Sat Hearing Ahead

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Bajaj Finance, the Non-Finance Banking Company (NBFC) from the Rahul Bajaj group, faces an upheaval task to recover dues from broking firm Karvy.

Though the Securities Appellate Tribunal (SAT) provided relief to estranged NBFC by agreeing to hear its case on December 10th, but it is unlikely to get hold of shares pledged with by the broker.

Bajaj Finance’s contention was that Karvy had an outstanding obligation of Rs 345 crore in addition to interest and other charges.

On Monday British Dispensary, now-banned Karvy Broking transferred shares back to 83,000 clients, which helped almost 90% of the Demat account holders of brokerage to recover their investments.

Karv’s unilateral decision will have a grueling effect on the hitherto long-drawn recovery process, feel lenders.

Since most of the shares were kept as securities for loans made by banks, and “unilateral” transfer of shares will have a chilling effect on this stream of lending, HDFC Bank, ICICI Bank and Indusind Bank told the SAT during the hearing.

As per the market experts, the mess at Karvy Stock Broking Is much bigger than first believed.

The market regulator now estimates the misuse of client securities by the broker at Rs.2,800 crore, 40% more than the Rs.2,000 crore it determined earlier.

The true extent of the mess at Karvy will be clear only when EY India Ltd, which is conducting a forensic audit on behalf of the National Stock Exchange of India Ltd (NSE), submits its findings.

Still, the crisis at Karvy highlights the risks clients face when they entrust their securities with brokerages.

Banks have Rs 1,415 crore in fund-based exposure to Karvy and some more in non-fund based guarantees.

The banks with exposure to Karvy, according to documents filed with the ministry of corporate affairs, include ICICI Bank (Rs 875 crore), HDFC Bank (Rs 195 crore), IndusInd Bank (Rs 105 crore) and Aditya Birla Finance (Rs 100 crore).

On November 22nd, SEBI barred Karvy from acquiring new clients and from using power of attorney, thereby barring it from trading on behalf of clients, after the broker allegedly transferred clients’ money for other purposes and indulged in trade not authorized by them.

If the pledges are invoked on some client securities, then it is the clients who would need to bear huge losses.

What could all these developments mean for Bajaj Finance ahead?
We believe that the core business model of the company remains strong and it is unlikely to create any big damage to the overall profitability ahead.

Also one must remember that Bajaj Finance makes very high NIMs and hence carries a bigger buffer of losing when compared to the other private banks where NIMs range between 3.5 to 4%.

Again this being a one-off and a non-recurring type – won’t happen every year so investors should not worry over here and any dip should be used as an opportunity to accumulate this blue-chip.

However going ahead for the Finance against Shares business, could see a drastic fall in volumes if NBFCs and Banks get stuck here which eventually would impact liquidity in the markets going ahead.

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