CONSUMER CREDIT
It is a finance to
consumers For the purchase of semi durables and durables by paying a part of
the total price Reavis Cox, an authority on economics of consumer
finance defines consumer finance as ―Business procedure-durables throu and
durables other than real estate, in order to obtain from them a series of
payments extending over a period of three months to five years, and obtain
possession of them when only a fraction of the total price has been paid.
According to E.R.A. Seligman, an
authority on consumer fin finance refers to a transfer of wealth, the payment
of which is deferred in whole or in part, to future, and is liquidated
piecemeal or in successive fractions under a plan agreed upon at the time of
the transfer.
1Characteristics of Consumer Credit
The nature of consumer
credit may be the transfer of wealth to consumers for purchase of semi durables
or durables except real estate where the payment is deferred in whole or in
part upon agreed terms the agreed terms for repayment may be in the form of
EMI.
Consumer Finance Transactions
The nature of consumer finance transactions may be
(a) Parties and
Structure of the Transaction: The parties and the
structure of the transaction may be either (i) Bipartite (ii)
Tripartite.
A bipartite transaction involves two parties i.e.
1. Dealer-Cum-Financer
and
2. Borrower
or Customer.
A tripartite transaction involves three parties
1. The
dealer
2. The
financier
3. Borrower
or customer
Transactions can either
be structured in the form of hire purchase, conditional sale or credit sale,
but a majority of the tripartite consumer finance transactions are of the hire
purchase type.
(b) Payment for the
transaction: The payment for specific transactions is
divided into two categories: (i) Down Payment Schemes (ii) Deposit
Linked Schemes.
The down payment varies
from initial payments ranging from 20%-25% of the value of goods and financing
is available for 75%-80% or as the case may be.
In a deposit-linked
scheme, the down payment in the form initial deposit varying from 15% and 25%
of the total value of the asset. The financier pays the full amount to the
seller. Deposits carry a prescribed interest rate. Zero Deposit schemes are
also available, under which the Equated Monthly Installment (EMI) is higher
than the EMI under normal deposit schemes.
(c)
Repayment Period The
repayment period ranges from 12-60 months. Finance companies notify the
customer indicating the amount of equated monthly installments to be paid
through postdated Cheques.
(d)
Security: The
asset is secured through first charge on it for the credit provided. The
borrower is prohibited from disposing, pledging or hypothecating the
asset during above said credit period.
(e) Eligibility
Criteria for Borrowers There is no specific criteria for
borrowers, all the borrowers in the form of individuals, partnership
firms, private and public limited companies are eligible to borrow.
2 Nature of Consumer Classes In India
The middle income class
refers to that class of people between the lower income groups and higher
income groups. The need to study the middle income class in India was
felt because the consumer finance was absolutely designed to meet their
financial requirements and in turn upgrade their standard of living. Moreover
the total population of middle class in India exceeds more than 2/3 rd of the
total population.
• India has registered
a very impressive growth of its middle class – a class which was virtually nonexistent
in 1947 when India became a politically sovereign nation.
• At the start of 1999,
the size of the middle class was unofficially estimated at 300 million people.
• The middle class
comprises of three sub-classes: the upper-middle, middle-middle and lowermiddle
classes.
• The upper-middle
class has an estimated 40 million people.
• The middle-middle
class has an estimated 150 million people,
• The lower middle
class comprises an estimated 110 million people.
3 Consuming Class in India:
Source: National
Council of Applied Economic Research (NCAER). Estimated households by annual
income Structure of the Indian consumer market (1995-96)
1.Data on income
distribution of households is insufficient in determining market size for
different consumer product in India. a. This because of the lack of homogeneity
of the consuming class and the varying prices of a single product in different
parts of India. b. Consumption habits of households are therefore better
determinants of consumer market size than income distribution.
2.While determining
market size for a consumer product, the structure of the consuming class as
seen in the above, can be both revealing as well as misleading depending on the
kind of product. For example, any specific consuming class would be fit to be a
market for consumer products like tea or soap, but a product such as vacuum
cleaners would find market largely only in the ―consumers and rich segments of
the market as defined in the above table .
3. Identifying a
plausible market size for a consumer product is therefore a hazardous task in a
heterogeneous country like India. Yet, the marketer needs some data to come as
close to the real picture as possible. For this purpose, it can be cautiously
assumed that purchasing power is proportional to income despite variables such
as location, taste etc. Companies are therefore advised to plan their consumer
product marketing strategies on an area-by-area basis, rather than on the
country as a whole.
Latest Developments in Consumer Credit
Changing Consumer Behavior
The behavior of the
consumers in India witnessed a remarkable change esp. the attitude. The Indian
consumer is fast changing his habits, borrowing money to buy the products he
wants, not content with buying what he can afford. The resultant consumer boom
is what market strategists explain as the key to the success of the Indian
consumer finance market.
a. Consumer finance
today helps everyone to upgrade his standard of living right now instead of
waiting for years for his savings to accumulate.
For manufacturers, it stimulates demand and lowers
inventory
For middlemen, it‗s a
sales boosting device
For players of consumer
finance, it‗s a means of profit generation.
b.
The culture of buy-now-pay-later is
fairly present in India, evolving through various forms like consumer lending,
consumer credit, consumer loans, friendly and family borrowings, daily payment
schemes etc.
c.
The basic objective of consumer financing is
that the consumer‗s present spending habits tend to be geared to expectations
of future income. They are losing their fear of borrowing of consumer finance.
d.
Along with buying a home, consumers
prefer consumer finance to buy home appliances and vehicles, opting for finance
based on the rate of interest, administrative fee, processing fee, commitment
charges, pre-payment penalty, types of facilities, standard and kind of
services mix other terms and conditions.
e.
These are members of a growing breed of
normally conservative middle-class Indians who are opting for consumer finance
loans despite the high interest cost being charged.
Impact of Consumer Finance Growth on
Consumer Durables Market:
The impact of consumer
finance has a direct impact on the fortunes of the consumer durables market
including two wheelers and passenger cars. This correlation is already clear
from the surge in demand in recent times. Sales of cars would grow at an even
faster 20% annualized, as the gradual decline in excise duties makes the
vehicles more affordable.
(a) Passenger Cars and Two-wheelers:
Sales of passenger cars
increased by 26.5% in the first half of this fiscal, owing to the lowering of
excise duties in the general budget. The two-wheeler industry grew by 8.9%
during this period, much slower than the heady high-teens growth over the past
two years, as the agricultural slowdown last year hit rural incomes.
Two-wheeler sales are expected to increase at a compounded 15.6%. Car sales would
rise at an even faster 20%.
(b) Key Issues and Success Factors:
For
the consumer finance companies to flourish there is need to develop a credit
information system, which will ease the process, making it faster and easier to
determine the creditworthiness of customers.
•
Ability to offer simple, convenient and innovative consumer finance products, a
wide distribution network and choice of repayment tenor, documentation and loan
offer.
•
As a result of the large number of players, market pressures, increased
competition, increased awareness and wider offerings consumer-financing
activities need to become customer-oriented and user-friendly.
•
One of the perceived problems relating to consumer finance is the absence of
credit bureaus to rate the creditworthiness of consumers. As of now, the advent
of information technology has paved way for sharing data about defaulters among
private sector banks. Any loan proposal is based on this shared information
before further process.
(c) Innovative Solutions
The banks are lending against collateral and have concentrated on small
potential borrowers to achieve disbursal targets.
•
The Vijaya Bank offers V stock‗ for loans against shares; V equip‗ loans to
help professionals acquire equipment and vehicles; and V-cash‗ to enable clean
loans against salaries after getting an employer‗s guarantee.
•
Judges, cops and teachers can now get cheaper loans with banks spinning out of
new products to cash in on the great retail rush. The country‗s largest
commercial bank, State Bank of India, will charge lower interests to these set
of borrowers for buying a home, car, two-wheeler or simply opting for personal
or festival loans. Concessions would be given to them on interest rate,
processing fees and margins under three new schemes;
Ø Teacher plus’,
Ø Police plus’
and
Ø Justice plus’.
The
move, SBI officials say, is aimed at capturing the market share in different
segments. The bank aims to tie-up with various organizations, to put in place a
structure, where the EMI or (equal monthly installment) for servicing the loan
will be debited from the salary accounts of the borrower. A tie-up would
minimize default risk. On home loans, teachers, policemen and judges will be
charged 0.25% lower than interest charged to other borrowers. At present, the
normal SBI home loan rates are 9.25% for 10 to 20 years. Similarly, car loans
will also be charged 0.25% lower than the usual rate, currently pegged at the
medium-term lending rate (MTLR) of 11.25%. For scooter and motorcycle loans,
the rates will be 0.35% lower. SBI normally charges a spread of 0.85% over its
MTLR, but for teachers, policemen and judges, the spread will be 0.50%.
Effectively, they would
be charged 11.75% as against 12.1% for other customers. In case of personal
loans, the spread over MTLR will be reduced to 2% against 2.23%. Effectively,
these three special categories of borrowers would be required to pay 13.25%,
instead of 13.6% for festival loans, SBI would be offering a spread of 2.25%
over the MTLR, as against 2.5% charge to its regular customers. Thus, the
festival loans would cost 13.5%, as against 13.75%.
Again, the processing
fee on personal and two-wheeler schemes will stand reduced to 0.75%, as against
1% charged to its regular customers. The absolute fee for festival loan schemes
has been reduced from Rs.100 to Rs.75. Margins are also being relaxed. For home
loans, it has been brought down from 15% to 10%, and for repair and renovation,
it will be reduced from 20% to 15%. In case of car loans, the margins are
pegged at 10%, against 15% for cars priced up to Rs.4 lakhs and 20% margins,
while a 2-4 years old car will attract 30% margin. For scooters and motorcycles
up to Rs.50, 000, the margin would be 5% as against 10% for regular customer
and 10% (as against 20%) for over Rs.50,000. The bank does not charge any
margin for festival and personal loans.
(d) Credit Constraint in Rural India for
Consumer Durables
According
to a new survey, Role of Consumer Finance in Rural India‘ conducted by Chennai-based
Anugrah Madison and Delhi-based Marketing and Research Team (MART), the future
growth for consumer durable is Rural India. The constraints involved are the
reluctance of banks to provide finance and the lack of electricity in 2/3rd of
the homes. Penetration of consumer durables would be cheaper in rural India if
banks were ready to finance them. Banks have shown reluctance in this sector
and restrict themselves to tractors and diesel pumps. While the consumer
durables market is facing a slowdown due to saturation in the urban market,
rural consumers are ready to put their money on the counter if consumer finance
is made available and basic infrastructure requirements such as electricity and
voltage are ironed out. Currently, rural consumers purchase their durables from
the nearest towns, leading to increased expenses due to transportation, Hence,
purchase is necessarily only done during the harvest, festive and wedding
seasons –April to June and October to November in North India and October to
February in the South, believed to be months good for buying away from
financing rural consumers.
(e) Consumer Preferences:
Indian consumers
identify ease and speed of the loan application and approval process, as well
as flexibility of evaluation procedures, as the key drivers of financing
satisfaction. Consumer financing Satisfaction performance is measured by four
factors:
•
Application process
(44 %);
•
Approval and
documentation (22 %)’
•
Financeadvisor (18 %); and
•
Loan
value (16 %).
Customers who obtained
their loans from a nationalized bank are relatively more satisfied than those
choosing a non-banking finance company (NBFC) or a foreign bank. Low interest
rates and the reputation of the finance company are among the key reasons for
customers who opted either for an NBFC or a foreign bank. In comparison, past
experience and personalized service are the main reasons indicated by those
opting for a nationalized bank. Furthermore, more than 50% of NBFC and foreign
bank customers obtained their financing at an automobile dealer or through a
direct selling agent of the finance provider. In contrast, more than 90% of
nationalized bank customers obtained their financing directly through the bank.
The car finance market has reached a new level of maturity, so much so that the
carmaker, the automobile dealer and the financier now work together to provide
better features and funding options for the buyer. Depending on the
manufacturer, tenure of the loan and credit history of the car buyer, interest
rates, on a reducing balance basis in the 10-13.5 % range for new cars compared
to 13-16.5 % for old cars. There is an increased preference for financing car
purchases through loans.
4 Importance of Consumer Credit In India
The
following best explains the importance of consumer credit in India.
(a) Increasing Risk in
Corporate Lending increasing risk in corporate lending,
banks are forced to opt for an alternative spot for finance. The
supernormal growth in retail finance has made it the primary driver of banks‘
asset books. It is expected to capture 40-50% of banks‘incremental lending by
end of financial year 2004. Banks share in incremental retail advances (%)
FY2003 FY2004 State Bank of India 39.1 40.4 HDFC Bank 39.1 62.9 ICICI Bank
209.7 174.1 Corporation Bank 72.0 64.3 Andhra Bank, 48.8 Union Bank of
India 23.5 21.3 Punjab Nation Bank 0 0 ING Vysya Bank 28.1 22.8 Oriental Bank
of Commerce 107.0 66.2 Bank of Baroda 75.3 29.4 Canara Bank 25.6 35.7
(b)
Housing Loans Housing
loans have been the product of choice for state-owned banks because of
their attractive profitability, low risk weight-low delinquency history, and
the ease of processing loans. All the state-owned banks have recorded explosive
growth in their mortgages; this has vastly expanded the market.
(c)
Consumer Durables Banks
have entered almost all the segments in retail finance. They are gaining
share from NBFCs. Private Banks have started offering loans for low-ticket
items like consumer durables and two-wheelers, besides personal loans. Some
schemes of some banks are given below:
•SBI has struck
a preferred-financier arrangement with carmaker Maruti, and now markets these
can loans from more than 2,000 branches. The bank has also tied up with Bajaj
Auto and TVS Motors to finance two-wheelers.
•SBI is offering
3-year two-wheeler loans at an interest rate of 10% across all sales outlets of
these companies. These alliances are significant, because they have extended
the availability of car and two-wheeler finance to second-and third-tier towns.
•Axis Bank has tied up with Ford Credit as a
preferred financer for Ford cars.
•Punjab National Bank has struck a similar
arrangement with Hyundai.
• More such alliances are expected between carmakers
and state-owned banks. These arrangements will drive strong growth in car
finance market over the years to come.
(d) Reduction in
Interest Rates Falling interest rates, coupled with
increasing loan durations, have substantially reduced the EMIs on retail
loans, thereby making them affordable to more people than ever before.
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