MUMBAI, Dec 6 (Reuters Breakingviews) - It’s rare for a tycoon to willingly give up an inch of their company. Boss Mukesh Ambani might do precisely that to fund a push by his $220 billion Reliance Industries (RELI.NS) conglomerate into consumer lending. It underscores his ambition in India’s booming financial services.
Given its reputation for disruption, Reliance’s plan is forcing rivals to sit up and take notice. The company is spinning off and listing its little-noticed non-bank financial company. Jio Financial Services will count as India’s fifth largest lender by net worth behind top banks including HDFC Bank (HDBK.NS) and Axis Bank (AXBK.NS) , per Macquarie analysts. The assessment of its potential size assumes the new entity will sell its 6.1% stake in Reliance worth about $13 billion to support the endeavour. If those shares don’t find their way into the hands of another family entity, the Ambani ownership of India’s biggest company by market value would fall to about 44%.
A ramped up Jio Financial poses a direct challenge to Bajaj Finance (BJFN.NS) , a $50 billion shadow lender and investor darling trading at a vertigo-inducing nearly seven times estimates of its one-year forward book value. It’s a threat too to Paytm (PAYT.NS) , which runs check-out services across the country and is trying to score a licence to lend but is running into regulatory hurdles – its heavy foreign backing by affiliates of China’s Ant Group doesn’t help.
More than rivals, Ambani is sitting on a treasure trove of data to assess the credit worthiness of borrowers. In theory, he’ll be able to offer loans to some 420 million mobile subscribers Reliance has acquired from scratch over the past six years – a feat that has made it India’s largest telecom operator handling over half of India’s data traffic. Other customers might include 190 million registered shoppers that visit its 16,000 retail stores. Jio Financial loans could help them purchase everything from air purifiers to flat-screen televisions.
Demand is booming. Bank loans for consumer durable goods grew 57% year on year in October. And the opportunity is large too. Just 12% of Indians above the age of 15 say they have borrowed from a formal financial institution, per World Bank data for 2021.
If that wasn’t enough support, Ambani has two of the country’s most respected bankers behind him. Former State Bank of India (SBI.NS) boss Arundhati Bhattacharya is on Reliance’s board. And K.V. Kamath, the man who built $80 billion ICICI Bank (ICBK.NS) , India’s second biggest private sector lender, is Jio Financial’s newly appointed non-executive chair. Ambani will need their smarts.
As a home-grown tycoon, Ambani has a better chance of success than other late entrants to financial services. Meta Platforms-owned (META.O) WhatsApp was portrayed as the ultimate disruptor a few years ago and is now part of Reliance’s plans to acquire merchants. The U.S. tech giant hasn’t made much of a dent in retail payments on its own.
Yet competition is sharper in lending than in telecoms and retail where Reliance has battered rivals. Take Bajaj. It has an impeccable brand, a physical presence with over 140,000 points of sale and its app is on track to go fully digital across all its products and services by March 2023. Meanwhile, Paytm’s 30 million merchants across grocers and streetside-stalls, which represent another important group of borrowers, place it above Reliance’s 2 million base of similar partners. There isn’t much room to innovate, Reliance admits.
Jio Financial might be able to raise money to lend at better rates than rival shadow lenders because Reliance is rated above the sovereign whose 10-year bonds yield 7.2%. The conglomerate will be no match for traditional banks, however. India’s three largest private banks have cheaper access to funding because they only pay 3% for on-demand deposits of up to $60,000.
It’s widely believed that Ambani’s ultimate ambition is to have a fully-fledged bank, an area the Reserve Bank of India has tried to keep tycoons out of. Reliance’s lending business is getting ready to ramp up and it owns a separate licence to raise deposits. That doesn’t quite add up to a bank, but it is enough reason for rivals and regulators to squirm.
(The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Updates to add charts.)
CONTEXT NEWS
Reliance Industries on Nov. 4 announced the appointment of K.V. Kamath as non-executive chairman of its subsidiary Reliance Strategic Investments, its non-bank financial company. He is the former managing director and chief executive of ICICI Bank.
On Oct. 21, Reliance revealed plans to spin off Reliance Strategic and rename it Jio Financial Services. A 6.1% stake in the Mumbai-listed parent company will also be transferred to the new entity that will be listed in Mumbai.
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