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Sub-prime market is thriving in India

Estimated US$10-11b market for unsecured credit growing at 25-30%

(NEW DELHI) Like the US, India too has a sub-prime market and it is booming. The success of early entrants like Citi Financial and GE Money has encouraged several others to enter the consumer lending business – nearly half of which is a sub-prime market, says a report in Business Standard.

These include players like HSBC (Pragati Finance), Stanchart (Prime Financial), Fullerton India, DBS Cholamandalam and Indiabulls.

Many more are coming. Industry sources said Barclays, Deutsche Bank and AIG are eyeing the segment, which includes private lenders like ICICI Bank and HDFC Bank, which entered in 2004.

What is attracting them is an estimated US$10-11 billion market for unsecured credit, which is growing at 25-30 per cent, according to Citi Financial managing director Sandeep Soni. The smaller players are growing at 50 per cent or more.

‘The non-banking finance companies, or NBFCs, are riding on the aspirations of people who were under-served by banks,’ said Mr Soni.

‘It’s an untapped market. There’s an opportunity to expand the market like in telecom,’ said Rajeev Yadav, head of personal loans at GE Money. Sub-prime has become a dirty word, so many multinationals in India call it a nearprime market and refuse to draw parallels.

A typical sub-prime customer is the self-employed, neighbourhood retailer or a trader who needs credit to buy goods and grow his business. He may be filing a tax return – most show an income of 70,000 rupees (S$2,604) to 80,000 rupees – but it does not truly reflect his cash flows.

‘Many of these people do huge business in cash; there’s no way it can be registered on paper. We use a lot of surrogates to estimate their income or cash flows,’ said Biju Pillai, business head, personal loans, HDFC Bank.

Take a car mechanic, who comes to borrow, say, 25,000 rupees. Lenders like GE Money will look at surrogates like his bank balance or his credit card records or visit his shop to estimate his income.

‘If he maintains an average bank balance of 2,000-3,000 rupees and that’s increasing or services an EMI of 1,500 rupees on credit card or another loan, it shows he has cash flows. Banking tells us about a guy’s character, about his cash flows. His ability to service an existing loan or an EMI indicates his credit-worthiness,’ Mr Yadav added.

‘You can’t expect people to have either of the two where only 30 million people file tax returns and most of the economy runs on cash,’ said a senior executive with an NBFC.

To expand their pool of customers, companies like GE Money run pilots to test various surrogate programmes (based on income, quality of bank statements, earlier loan or field verification). At any given point, these companies have five to six surrogate programmes running.

Customers for NBFCs also include salaried people and professionals like doctors and chartered accountants, who are prime customers.

A salaried employee could be a business process outsourcing executive earning 8,000-10,000 rupees a month who wants to buy a bike, a mobile phone or a personal computer. The customer could also be a blue-collar worker who wants to do up his house or buy a refrigerator or TV. Many of these are first-time borrowers.

In the absence of credit history, companies like Citi Financial have built a database of customers by providing loans for two-wheelers, television, washing machines, TV and mobile phones, on which they do not make much money. ‘This is the best way of getting customers on board and creating a pool of tested customers,’ said Mr Soni.

The average ticket size for these loans is 25,000 rupees but could go up to 100,000 rupees. They come with a term of 25 months and interest rates of 45-50 per cent. But the high cost of operations and sourcing (10 to 15 per cent) and defaults (5 to 15 per cent) partly negate the margins.

 

Source: Business Times 4 Sept 07

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