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Consumer Finance and Venture Capital
Consumer Finance and Venture Capital
The services of banks which facilitate finance for purchasing consumer durables is called
consumer loan or credit or finance. It refers to the raising of finance by individuals for
meeting
their personal expenditure or for the acquisition of durable or semi durable goods. It is an
important
asset based financial service in India. The objective of consumer finance is to provide credit
easily
to the consumer at his door steps. This include credit merchandising deferred payments,
instalments, instalment buying, hire purchase, payout of income scheme, pay-as-you earn
scheme,
easy payment, credit buying, instalment credit plan, credit cards etc.
Features of consumer credit
1. Acquisition of durable assets- it is a method of financing for acquiring durable and
semidurable assets
2. Individual financing- under consumer credit scheme, finance is provided to individual or
to joint individuals.
3. Immediate possession-consumer get possession of assets immediately when a fraction of
price is paid
4. Payment in instalments – under consumer credit scheme assets price is paid through
number of instalments.
5. Short or medium term finance- duration of finance normally ranges between 3 months to
5 years.
6. Agreement – when there are only 2 parties to the contract, it is called a bipartite agreement
(customer and dealer cum financier) and where there are three parties, such agreement called
tripartite agreements (the customer, dealer and financier).
7. Multiple structure- structure of financing may by way of hire purchase, conditional sale
or credit sale.
8. Down payment- it involves down payment normally ranging from 20 to 25% of asset
price.
Forms / Types of Consumer credit
1. Promotes blind buying- facility to purchase at somebody else’s money tempts people to
buy
blindly and unnecessary articles.
2. Leads to Insolvency: blind buying of goods make these people insolvent/ bankrupt within
a
short span of time.
3. It is costlier: along with the convenience that it offers it charge the customers for all these
convenience offered. Thus it becomes costlier.
4. Artificial boom: the economic development posed by the impact of consumer credit is not
real but artificial.
5. Bad debt Risk: by whatever name called credit is always have inherent credit risk. Default
is a major threat of consumer credit.
6. Economic Instability: artificial boom and depression leads to economic instability and
causes chaos in economic progress.
Conditional loan: It is repayable in the form of a royalty after the venture is able to generate
sales. No interest is paid on such loans. In India, VCFs charge royalty ranging between 2 and
15 per cent;actual rate depends on the other factors of the venture, such as gestation period,
cost-flow patterns and riskiness.
Income note: It is a hybrid security which combines the features of both conventional loan
and conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at
substantially low rates.
Conventional loan: Under this form of assistance, the enterprise is assisted by way of loans.
On the loans, a lower fixed rate of interest is charged, till the unit becomes commercially
operational. When the company starts earning profits, normal or higher rate of interest will be
charged on the loan. The loan has to be repaid as per the terms of loan agreement.