Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Asia-PacificApril 6 2008

Lenders get burned

The consumer credit market has been growing but a slowing economy and lax processes have taken their toll on some players, says Kala Rao.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Chandrakant More, a bus conductor in Mumbai, takes home a monthly salary of about Rs12,000 ($296) and is short on cash to pay for his daughter’s admission to a good school. He has a savings account but his bank has refused a loan because he lives in an illegal slum and does not own any assets. Until recently, Mr More was the perfect customer for the local moneylender but in September last year he got a much cheaper loan of about Rs25,000 from a new lender in his neighbourhood, Fullerton Credit, the Indian consumer finance arm of Singapore-based Temasek.

India’s growing economy is producing hordes of loan-hungry consumers with no access to bank loans. This underserved market, which some estimates put at 50 million households, represents a vast, untapped opportunity for lenders. In recent years, foreign lenders such as Citigroup, General Electric, Standard Chartered, HSBC, Temasek, Development Bank of Singapore (DBS), and Indian lenders such as ICICI and Kotak have begun making inroads, selling unsecured loans, some as small as $500, to workers with growing incomes but almost no credit history or legal documents.

In January this year, that alluring picture cracked when news broke that GE Money, the first global company to enter the business about 14 years ago, had put its mortgage and personal loan subsidiary on the block. The company denied the report and its spokesperson told The Banker: “GE Money India is seeking a strategic partner for the wholly owned personal loans and mortgage portfolio only.” Investment bank Morgan Stanley has a mandate to find that strategic partner; GE Money put the size of the asset portfolio at $1.8bn but declined to disclose details about financial performance.

Faced with rising loan losses, Citifinancial, another pioneer in the business, shut down its consumer durable and two-wheeler finance business in March. It has decided to sell consumer loans only on credit cards and to cut down small-ticket, unsecured personal loans, citing high dealer commission and collection costs as the reasons for its decision. ICICI Bank, too, is reportedly not extending new loans. Taken together, the three companies have about half the $8bn-$10bn market.

Big and burned

So how did the biggest companies get burned? The economy is slowing down this year and the demand for consumer durables was hit hard. Not surprisingly, lenders such as GE Money and Citi, which had agreed to pay fat commissions to dealers on these loans, suffered.

They are not the only ones. Most companies have reined in the uncontrolled growth and aggressive sales of personal loans of the past. “Swamped with loan offers, customers borrowed from multiple sources; there was no way companies could keep a check on this,” says Gopalsamudram Sundarajan, managing director at Fullerton Credit.

Many loans were made after the most cursory background checks by aggressive direct sales agents hired by consumer credit companies and, typically, information about the borrowers’ credit was not available from the credit bureaux. As the companies eagerly opened branches in remote towns, finding and hiring good loan officers had become a challenge. “Growth at the cost of controls does not pay,” says Ravi Subramanian, who heads Pragati, HSBC’s consumer finance arm.

As bad debts piled up, collection on them proved difficult. After ugly news stories appeared in the local press last year about coercive methods used by private ‘collection agents’ on poor borrowers, the central bank cautioned lenders, directing them to seek board approval of their loan pricing and to use lawful methods to collect on debt. Most personal loans carry an annual interest charge of more than 30% to cover the cost of origination, servicing and high loan losses, says P R Somasundaram, head of business strategy at Standard Chartered, which acquired finance company Prime Financial from the merger with ANZ Grindlays, a few years ago. Mr Sundarajan adds that even at the high interest rates, there is huge demand as the loans are cheaper than those provided by a moneylender.

Cleaning up

Not surprisingly, all consumer credit companies have begun to tighten processes and to weed out the bad borrowers. Some have decided against outsourcing loan origination. Fullerton, for example, has instead set up neighbourhood branches – about 700 in the past two years – hired local employees and lends to those who live within three kilometres of the branch so that it has “eyes and ears close to the ground”.

Separating sales teams from ones that appraise credit in the company puts a check on incentive-driven loans, says Mr Subramanian. HSBC has also cut down on very small personal loans. More companies are now sharing information on loan defaulters with the credit bureaux so that a negative list is available to all lenders.

The Development Bank of Singapore bought 37.5% of India’s Cholamandalam Finance in 2006. DBS’s entry gave the joint venture a strong focus on retail and personal loans; retail assets almost doubled in one year. The company, however, is careful to de-risk the vulnerable unsecured loans in the loan book with a mix of secured loans to small businesses and to buy homes.

Few lenders can hope to make money anytime soon. Temasek has put $200m into its Indian business. Fullerton and HSBC Pragati say that they hope to break even this year, after three years in the business. Yet new entrants are keen to edge into the market: Reliance Money, Future Capital, Barclays, the Birla group and an Indian conglomerate, are among them. They should watch out for the pitfalls and be prepared for a bumpy ride.

Was this article helpful?

Thank you for your feedback!

Read more about:  Asia-Pacific , India