CONSUMER FINANCE

INTRODUCTION
Consumer Finance has been acknowledged as a growth sector by banks. It has
immense potential, high profit margin and low default rate. With liberal
policies of RBI, the consumer finance can easily increase. However, aggressive
marketing and establishing a client relationship, Is the key success in
consumer financing. The lending philosophy of RBI had undergone a change in
the post reform phase and there are not many constraints on consumer credit
extension now but banks do not appear to have changed their mind set yet.
Consumerism itself is fast growing in India, offering excellent scope for
lending.

Consumer finance includes all asset based financing options provided to

investors for acquiring consumer durables. In a consumer finance
transactions, an individual initially pays a fraction of the amount or cash on
purchase while promising to pay the balance with interest over a specified
time period. Television, Refrigerator, Scooter and kitchen equipments are no
longer luxury items but necessaries. Non Banking Companies are big players
in consumer credit. Some of the banks have been liberally extending loans but
they restrict themselves to high value loans in metro cities.

Citibank is the pioneer in consumer credit and retail banking. It has a personal
loan scheme under which consumer durable items can be purchased. Loans
are given to salaried employees and professionals for period ranging from 12
to 48 months. No guarantee is insisted upon for consumer credit. Many other
banks have different version of consumer finance schemes. The general
features of these schemes are more or less the same with minor variations in
the rate of interest or repayment period or insisting upon a third party
guarantee. Consumer Finance has many advantages for banks. They can
charge a little higher interest on these loans in relation to the priority sector
advances and that way improve profit margin.

The vast network of public sector banks offers great scope to quickly disburse
loans to the eligible applicants throughout India in massive numbers. Credit
expansion is fast, substantial and diversified. Consumer credit only for short
and medium term thereby facilitating smooth asset liability management.

GROWTH IN CONSUMER FINANCE

Indian economy had been witnessing a strong consumption led growth in the
last decade commensurate with experience of any emerging economy. A new
breed customer is emerging as there is greater proportion of young
population, changes in tastes, habits due to rapid urbanization, growth of the
electronic media, spread of education and increasing domestic and foreign
travel are changing the nature and composition of expenditure, with growing
emphasis on quality and brands. As domestic consumption demand has
become an important driver for economic growth, retail financing has started
playing an important role in India. In response to this, there have been active
efforts within the Indian banks to be more focused on consumer financial
products and services. As the penetration of retail banking in India is still
quite low, there is tremendous upward potential in this line of banking
business.

CONSUMING CLASS IN INDIA

Estimated Households By Annual Income

Annual Income (in Rs.)at 1994-95 No. of Households (in Millions)

Prices
< 25000 80.7
25001 - 50000 50.4
50000 - 77000 19.7
77000 - 106000 8.2
>106000 5.8
Total No. of Households : 164.9 million
CHARACTERISTICS OF CONSUMER FINANCE
 Parties and Structure of the transaction :
A consumer finance transaction can either be bipartite or
tripartite. A bipartite transaction involves the dealer-cum-financer and the
borrower or customer while in a tripartite transaction, the dealer and
financer are two separate entities. Transaction 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.

 Payment for the transaction :

Consumer finance schemes are divided into two categories :
1. Down Payment Schemes
2. Deposit Linked Schemes

The down payment varies from 20%-25% of the goods value and financing
is available for 75%-80% or as the case may be. In a deposit linked scheme,
the down payment varies between 15% and 25% of the total value of asset.
The financer pays the full amount to the seller. Deposits are of cumulative
nature and carry a prescribed interest rate. Zero Deposit schemes are also
available, under which the Equated Monthly Installment (EMI) is higher
than the EMI under 15%-25% deposit schemes.

 Rate of Interest and Repayment Period :

The borrower can choose a repayment period ranging from 12-60
months. Finance companies notify the customer indicating the amount of
Equated monthly installments that need to be paid through post-dated
cheques.

 Security :
The credit provided through first charge on the asset concerned.
The borrower is prohibited from disposing, pledging or hypothecating the
asset during the credit period.
 Eligibility Criteria for Borrowers :
Individuals, partnership firms and private and public limited
companies are eligible to borrow. Different companies follow different
criteria for financing. A sample hire purchase may include the following
conditions:

 Individual:
1. He should have a minimum of Rs.100000 as gross annual income.
2. His net take-home monthly salary should be about 3 times the Equated
Monthly Installment.
3. He should have had 2 years of employment with the current employer.
4. He must have a minimum of 5 years of employment until retirement.
5. He should not have changed more than 2 jobs during the last five years.

 Partnerships And Companies:

It must have a minimum net worth of Rs.2.5 Lakhs. It should exist for a
minimum period of four years. It should make profits for the last 3
years. The Net Profit plus Depreciation must be at least 3 times the
annual installment.

 The Big Small Scale Industry Problem:

The problem of credit delivery is easier to handle. The Reserve Bank Of
India is continuously extending its settlement schemes but banks are
not playing ball. They appear to be more interested in either investing in
government securities or in consumer finance. This has to be more
immediately corrected and the government should ensure that no
viable? Small scale unit goes under due to lack of finance. It is
interesting that the finance minister has announced a large fund to be
routed through SIDBI for providing cheap and long term capital.
IMPORTANCE OF CONSUMER FINANCE IN INDIA
a)      Increasing Risk of disintermediation in Corporate Lending
Retail finance has become the preferred business of banks on account of its
higher spreads. It is due to the fact of the increasing risk of disintermediation
in corporate lending. The supernormal growth in retail finance has made it the
primary driver of banks asset books. It is expected to capture 40-60% of
banks incremental lending by end of financial year 2004.
 
b)      Housing loans have been the product of choice for state0owned banks
because of their profitability, low risk weight-low delinquency history, and the
ease of processing loans. The priority- sector status accorded to residential
mortgages for less than Rs. 1mn is another factor in their favour.
All the state-owned banks have recorded explosive growth in their mortgages;
this has vastly expanded the market.
 
c)       Banks have entered almost all the segments in retail finance. They are
gaining share from NBFCs. Private Banks have started offering loans low-
ticket items like consumer durables and two-wheelers, besides personal loans.
Some schemes of some banks are given below.
 
*Union Bank has tied up with Ford Credit as a preffered financier 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 next three years.
* SBI is offering 3 year two-wheeler loans at an interest rate of 10% across all
sales outlets  of these companies.
 
d) Falling interest rates, coupled with increasing loan durations, have
substaintially reduced the EMIs on retail loans, thereby making them
affordable to more people than ever before.
 
 IMPACT OF CONSUMER FINANCE GROWTH ON
CONSUMER DURABLE MARKET
 
 Passenger cars and two wheelers

 Key issues and success factor

 Innovative solutions

 Credit constraint in rural india for consumer durables

 Consumer preference

 Consumer finance by GE countrywide.