Earlier this year, when 56-year-old Kevin M. Blakely, CEO of RMA, a USbased risk management association, testified on the subprime crisis before a finance sub-committee of the US Senate, he said the gloomy environment offered an excellent opportunity to learn from mistakes and improve risk management processes. “As we muddle through the misery, we are all smarting from it and (emerging) smarter for it,” he remarked.
There is now more focus on automation and credit scoring models to improve efficiency and reduce judgemental challenges in underwriting of unsecured loans - Rahul Soota MD, Citifinancial India
An Indian clone
Unlike in the US, the Indian banking sector, which is neck-deep in consumer lending, escaped unhurt mainly due to its diversified portfolio of corporate, SME and retail assets. But non-banking finance companies (NBFCs) have not been so lucky, and their troubles, in some ways, resemble the subprime crisis in the US.
Several leading NBFCs, all boasting impeccable pedigrees—CitiFinancial, SBI Cards, BoB Cards, Cholamandalam DBS Finance and GE Money—are counting their losses and licking their wounds.
Among the big boys, only Fullerton India Credit Company, promoted by Singapore’s Temasek Holdings, seems to have escaped unscathed, but then, it’s a recent entrant into this game, and it may be too early to pass judgment. As a result, perhaps, there’s a huge churn in corner rooms.
Pavan Dhamija, who helped build GE China’s consumer finance business, joined the Standard Chartered Bank-promoted Prime Financial as CEO in January, 2007 only to leave a year later.
SBI Cards CEO Roopam Asthana left last month, while GE Money replaced its President & CEO Vishal Pandit in January. Sandeep Soni, CEO and founding member of CitiFinancial, was also replaced but he was asked to lead Citi’s distribution initiatives in newer domains.
Taking a knock
Some of the biggest names in the sector have been badly scarred by delinquencies
Pedigree: 60:40 JV between State Bank of India and GE Money
State of affairs: Registered losses of Rs 150 crore for the year ended March 31, 2008 The company’s CEO, Roopam Asthana, has been replaced by Diwakar Gupta.
Pedigree: Bank of Baroda
State of affairs: This credit card subsidiary never took off, and lost Rs 21.20 crore during the year ended March 31, 2008. BoB is seriously studying a proposal to merge the subsidiary with itself.
HSBC Pragati Finance
Cholamandalam DBS Finance
Fullerton India Credit Company
Small is dangerous
Says Bhatia: “The system as a whole can absorb this shock, but individual lenders, who are heavy on unsecured loans and on high-risk customers, will suffer significant losses.” NBFCs that have large portfolios of unsecured, small-ticket personal loans of Rs 10,000-20,000 are particularly vulnerable.
Cholamandalam DBS Finance, too, has decided to partially exit the smallticket segment even as it continues to pursue a mid-ticket strategy through aggressive re-pricing and increase in the ticket sizes.
Experts attribute the sudden bout of delinquencies to a combination of the economic slowdown, interest rates hikes and rising inflation, which have impacted household budgets. “There were also traces of overexuberance by NBFCs, which led to a decline in credit standards,” say experts, though no NBFC is ready to admit this.
The impact is much sharper in companies that are predominantly into single products like credit cards or unsecured loans like personal or used car loans as there are no other assets classes to cushion their losses. Borrowing a line, perhaps unwittingly from Blakely, Standard Chartered Bank’s Swaroop says: “It is a period of learning for the industry.”
Many NBFCs and banks are talking of increasing the use of technology in collections and recoveries, training employees and collection agents, staying away from DSAs and introducing more stringent loan processing systems, while others are thinking of adding new product lines to broadbase their portfolios to absorb future shocks.
CitiFinancial, on the other hand, is slowly transforming itself into a one-stop shop for all financial needs of consumers in small cities and towns. “We have re-worked our strategy for small-ticket personal loans. While this will continue to be the main fare in smaller cities, in bigger centres, we will maintain it as only one aspect of a wider product menu,” says Soota.
In fact, SBI Cards is now considering expanding the scope of its operations by including other retail products in order to de-risk its business model. Its promoters, the State Bank of India and GE Money, have extended it a Rs 250-crore credit line to revive the beleaguered company.
Says CitiFinancial’s Soota: “There is now more focus on automation and credit scoring models to improve efficiency and reduce judgmental challenges in underwriting of unsecured loans.” Adds Banga: “We rigorously follow close to a dozen checks before we sign the loan cheque. And customer involvement in the whole process is very high.”
In fact, RBI is also concerned about NBFCs. This is reflected in its draft guidelines, which propose to raise the capital adequacy ratio of NBFCs from 10 per cent to 15 per cent by April, 2009. In addition, there is a requirement for half-yearly reporting of liquidity positions.
Light at the end of the tunnel
Despite the grim tidings, it isn’t curtains for the sector. The broad-basing of products, stringent controls on unsecured loans and yields as high as 30-40 per cent may yet see this very risky segment, where penetration levels are still low, through.
But as Swaroop says: “Risk assessment is the key.” And that’s why NBFCs—and also some banks—will have to go back to basics and rebuild their businesses, this time on stronger foundations.
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