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.