Business Today

Waiting For a Crisis?

Unsecured credit, such as personal or consumer durables loans, has made a strong comeback. And so have the risks.
By Anand Adhikari | Print Edition: September 11, 2016
Waiting For a Crisis?

A credit officer of a non-banking finance company, or NBFC, was baffled by a young woman's response to a question about the end use of a personal loan for which she had applied. "I need it to buy a Louis Vuitton bag," she said, without blinking an eye. Louis Vuitton handbags cost between Rs 50,000 and Rs 3 lakh.

Gone are the days when a personal loan was a social taboo and taken only in an emergency. Today, people are borrowing for child's birthday, foreign travel, purchasing white goods, home improvement, in fact every spending that would seem discretionary to most. And why not? Loans are, after all, a click away. If a bank slams the door on you, there is always an NBFC you can turn to. And if they, too, say no, you can always approach the new online peer-to-peer lenders. After all, you live only once. "In today's world, if you haven't taken a loan, people will probably think your credit score is not good," says Manavjeet Singh, Founder and CEO of Rubique, a platform that brings borrowers and lenders together with the help of technology. "Consumers are looking for instant gratification," he says.

After the slump post the 2008 financial crisis, when a number of banks and NBFCs shrunk their unsecured loan books in response to huge defaults, the tide has turned, and that too strongly. Unsecured loans, both personal and for buying consumer durables, are back. So is the risk of banks and NBFCs taking a big hit if a chunk of these loans turns bad, just like it did after the 2007/08 financial crisis.

Pavel Maco, CEO, Home Credit India (Photo: Shekhar Ghosh)

"We are mostly doing mobile phones under consumer durables. It's always good to test a customer with credit that is small"

According to the Reserve Bank of India, or RBI, data, unsecured credit has grown 20 per cent in the past one year. In the past five years, the growth has been 70 per cent - driven by 150 per cent rise in loans for consumer durables to Rs 17,800 crore. The largest segment, personal loans, grew 85 per cent to Rs 2.95 lakh crore during the period. According to the RBI data, the share of consumer credit in total bank credit rose from 18 per cent to 21 per cent over the past five years. The share of unsecured loans rose from 6.78 per cent to 7.4 per cent during the period. For some large NBFCs such as Bajaj Finance and Fullerton Capital, the unsecured loan book is almost half their lending book.

Demand Push

Between 2008 and now, India has grown from a $1-trillion to a $2-trillion economy. This has pushed up the per capita income from $1,000 to $2,000 levels. The boom in consumer credit has been in large part fuelled by this trend of rising incomes and growing aspirations.

Banks, having burnt their fingers after the 2008 global financial crisis, are focusing mainly on mortgages and only a bit on unsecured loans such as personal loans and that also to existing customers with good credit history. They are also being cautious in the consumer loan segment. NBFCs, however, have been quick on their feet to tap the potential in both consumer durables and personal loans. A recent report by ratings agency ICRA Ltd says banks' share in consumer credit shrunk from 66 per cent to 55 per cent in the past six years. NBFCs increased their share from 14 per cent to 19 per cent during the same period.

However, many expert say that banks will have to take the segment seriously due to sluggish credit growth, which has fallen to 8-9 per cent from 17-18 per cent five years ago. Consumer/retail loans can partly make up for the poor growth in corporate credit, they say.

Tectonic Shift

Another noteworthy trend is that of global players taking bigger risks. Japan's AEON Credit, for instance, is financing consumer products priced as low as Rs 4,000. Similarly, the Czech lender, Home Credit, specialises in in-store financing of consumer durables purchases. They are also experimenting with lending to first-time borrowers, ignoring the history of the financial services industry that is strewn with examples of global players paying heavily for lending to the wrong segment - Temasek-owned Fullerton and Citigroup's Citi Financial are among those hit badly when their bets in small-ticket personal loans went bad.

However, the lenders in India brush off these concerns. They say credit bureaus are helping them understand borrowers' credit/risk profile better so that the chances of a huge number of loans turning bad are not high. This confidence has given rise to loans that were unheard of some years ago. Tata Capital, for instance, is offering wedding loans, while Warburg Pincus-owned Capital First is giving loans for used cars. The Pune-based Bajaj Finance is giving travel loans. NBFCs are also offering zero interest consumer durables loans on which the interest is paid by the manufacturer or the retailer. "We are mostly doing mobile phones under consumer durables financing in India," says Pavel Maco, CEO, Home Credit India, which is also into two-wheeler and personal loans. Home Credit claims to be the No.1 financer of mobile phone purchases in the world.

Consumer durables can, in fact, be a big area for banks and NBFCs. "Financing consumer durables purchases is a niche area. It is a high-cost business because of short tenures and low ticket sizes. This makes banks stay away. Instead, banks are present here through credit cards and debit cards," says V. Vaidyanathan, Executive Chairman, Capital First. Close to 45 per cent consumer durables are bought in cash. Banks, through credit/debit cards, have a 40 per cent share, while the remaining 15 per cent sales are financed by NBFCs. This means huge scope for growth. Cosumer durables account for 43 per cent of Bajaj Finance's loan book.

The lenders are coming up with new ways of ensuring fewer defaults. Home Credit first gives loans for consumer durables. Only after it is satisfied with the payment record is he or she offered a personal loan. "It's always good to test a customer with credit that is relatively small," says Maco of Home Credit. Anand Natarajan, Head of Strategy and Business Execution at Fullerton India, says clarity over end use of a loan, like that for consumer durables, lowers the default risk.

Arun Ramamurthy, C0-Founder, Credit Sudhaar (Photo: Rachit Goswami)

"The doubling of growth numbers is not sustainable, as we have seen in the e-commerce space. I think the next crisis will be in retail lending"

Not that lending for consumer durables is without problems. "It is not profitable on its own. It sets a funnel for the future," says a market player. The biggest challenge is operating costs as the average life of a consumer durables loan is just four-eight months. The operating cost is 12-13 per cent. The cost of funds is 9-10 per cent. In addition, there are non-performing assets of 2-3 per cent. One has to lend at 22 per cent just to break even. "You have to underwrite consumer durables loans as any stress is visible early and can wipe out whatever little gains you have made in the portfolio," he says. Some say an imminent price war will impact margins further.

Personal Loans

Some banks have become a little more active in personal loans, the largest unsecured loan segment, though most are still fearful. HDFC Bank, for example, strategically decided to give personal loans only to existing customers with good credit history. ICICI Bank has shrunk its unsecured personal loan portfolio. Personal loans accounted for 10.7 per cent of its retail portfolio at Rs 14,413 crore at the peak of the boom period in 2006/07. Today, the figure is 4.8 per cent (Rs 10,215 crore). Banks, in fact, have quit many sub-segments of personal loans such as loans to self-employed and small-ticket loans. "They have moved to the top of the pyramid and lending to those with credit scores of over 850," says a banker.

This means the riskier loans are coming to NBFCs. "There is always a temptation to expand the unsecured book as a secured book does well in bad times but does not yield high margins in good times," says an NBFC player.

This is making NBFCs tap new segments. Credit Sudhaar, for example, runs an NBFC that lends to people whose past default was not intentional.

Possible Risks

Still, NBFCs' unsecured loans put them at a lot of risk as these form a big chunk of their portfolios. For banks, these loans are not even 5 per cent of their loan book. Take gold loan companies. In the period between 2005 and 2012, they expanded exponentially as gold prices zoomed. The growth turned flat after prices crashed. Similarly, those big on personal loans suffered huge losses in the 2008 global financial meltdown. Russia, too, has seen many consumer finance companies suffer due to crash in commodity prices.

NBFCs defend their due diligence norms and say they run their portfolios past credit bureaus to see if the borrowers' credit profile has changed after they took the loans.

Arun Ramamurthy, Co-Founder, Credit Sudhaar, who earlier worked with Deutsche Bank, says any explosive growth comes with excesses. "The doubling of growth numbers is not sustainable, as we have seen in the e-commerce space. I think the next crisis will be in retail lending," he says.

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