The Hindu : Business : Consumer loans have a price tag

Online edition of India's National Newspaper
Monday, Jan 03, 2005

Business

Business

Consumer loans have a price tag

The flip side to the surge in consumer loans should not be ignored.

CONSUMER CREDIT, often equated with retail lending by banks and other institutions, has become big business in recent times. While non-banking finance companies and large dealers in consumer durables have always provided finance to buyers, the business has become noteworthy with the entry of commercial banks. Banks, as a rule, have access to cheaper funds. Their entry into a business, which they had earlier avoided or were at best lukewarm, has had a number of consequences. Consumers, who now have a plenty of choice in buying consumer durables, have also been provided with the wherewithal. In fact availability of finance has gone hand in hand with the abundant supply of consumer goods.

The developments in the domestic passenger car industry since the 1990s, more than in any other sector, illustrate the phenomenon of consumption led growth. This would not have been possible if finance (to buy cars) had not been available that freely. In varying degrees other industries too — colour television and refrigerators, for instance — have benefited. In fact, the entire concept of consumer finance spurring demand — and over time economic growth — is a new phenomenon for India. No doubt the weakening of the traditional mindset to save has caused more middle-class buyers to borrow against future income. At the same time the release of pent-up demand among consumers long used to shoddy goods (here again the car is an outstanding example) has played an important role.

Consumer finance, as known in India, is an omnibus term and covers home loans as well as loans for other specific purposes. The recent surge in disbursements is partly attributed to the fact that banks have had to find newer avenues to lend to boost profitability. As the Reserve Bank of India Report on Trend and Progress of Banking in India, 2003-04 puts it, across the globe, retail lending has been the most spectacular innovation in commercial banking in recent years. In India retail lending has been the mainstay and a key driver of profit growth for banks. As on March 31, 2004, consumer loans accounted for more than a fifth of the advances portfolio of all commercial banks. (Rs. 189,041-crore consumer loans out of a total advances portfolio of more than Rs. 859,000 crores). Housing finance accounted for more than 47 per cent of consumer loans disbursed while the category "other personal loans'' was closely behind, accounting for 46 per cent of loans. The RBI figures do not give a break up of other personal loans but credit card receivables are put at Rs. 6,156 crores and outstanding loans under consumer durables at Rs. 6,256 crores.

New approach

More recently, banks have been lending aggressively for a variety of general purposes too. Encouraging individuals to borrow without having to provide security goes against the grain of Indian banking. For a long time, banks have followed a "need-based'' approach to lending. Obviously, financing a luxury car or a home theatre will not fit the bill. Among other reasons, the premium car (that is offered as security) depreciates almost immediately after it is driven out of the showroom.

The one major reason why the level of NPAs (non-performing assets) has not been high is simply this: for a new line of business such as consumer lending it is rather early to evaluate the track record of consumer repayments and therefore problem loans. However, industry analysts say that in certain segments of consumer loans trouble looms large. The level of defaults among car loan borrowers is reportedly high. Prudent non-banking finance companies, far more experienced than commercial banks in dispensing car loans, have steered clear of financing premium cars as a rule. Even in home loans, which have a "social'' content, the RBI has expressed its unhappiness over some reckless lending and inadequate documentation. Recently the central bank has drawn attention to many unhealthy practices of banks in the credit card business. The fact that banks charge usurious interest rates of between 2 and 3 per cent per month on credit card outstandings should not be forgotten.

Consumer loans, on a large scale, became feasible in an operational sense only because banks and other credit providers could harness technology extensively to extend their reach, monitor the loans better and reduce the transaction cost. Most banks, especially the foreign ones, dispense consumer loans through "associates" and other business models that bear no resemblance to a bank set up as is generally understood. The motive is to save costs but in practice one is not sure as to whether those banks have understood the damage the associates can do.

Finally, the surge in consumer credit ought not to come at the expense of bank finance for industry.

Now that there is a pick up in the industrial sector banks, will have ample opportunities to revert more and more to their traditional business of lending to create productive assets. Moreover, at the moment retail lending is confined to the metros and urban areas and cannot be a conduit for broad economic development.

C. R. L. Narasimhan

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