Consumer finance: Smaller players fill the void

A year-and-a-half back, Viral Patel, who runs an electronics goods showroom in the western suburb of Andheri, had agents from ICICI Bank, CitiFinancial and GE Money queuing up at his store to offer loans to customers. Dealer commissions on offer were as high as 3-4 per cent of the price of the item.

On Thursday, his sole financing partner is a local non-banking financial company (NBFC) called Nambiar Finance & Leasing, and the commissions have fallen drastically.

"Dealers were pampered by big players with various volume incentives," says Venkat Padmanabhan of Nambiar Finance. "Now that the big players are gone, we are getting more enquiries from dealers seeking to partner with us," he said.

The earlier boom in spending on white goods such as TVs, refrigerators and music systems was partly fuelled by the availability of cheap finance from banks and bank-sponsored NFBCs. However, large players found themselves squeezed from both ends - rising defaults and ballooning collection costs - when the credit cycle turned.

"This is a specialist business and not easy to do. If one is not careful, the cost of collecting an EMI (equated monthly instalment) can be as high as the EMI itself," said Rajeev Jain, chief executive officer, Bajaj Finance, one of the handful of big players still aggressive in the business. "Margins can be 16-18 per cent over the cost of funds, but operating expenses are very high too," said Jain.

The exit of the big movers has meant more opportunities for local players such as Nambiar Finance, which is just one of the 1,465 non-deposit-taking NBFCs registered with the Mumbai office of the Reserve Bank of India.

"About 12-18 months ago, we just had tie-ups with 60-70 dealers. Now, we have tie-ups with 120 dealers," says Padmanabhan.

Apart from local NBFCs, large players such as Bajaj Finance and Shriram City Union Finance are reaping the benefits of reduced competition. Bajaj Finance is aggressively expanding its distribution network and has tied up with 2,000-odd dealers and 15-16 manufacturers of white goods. According to Jain, the NBFC now finances 8-10 per cent of all liquid crystal display TVs sold in the country.

Another segment, which banks first embraced and then spurned, is the financing of two-wheelers. Here, too, the few players left are reaping the benefits of an open field.

"Definitely, finance opportunity has increased due to the absence of major lenders in the consumer finance and two-wheeler finance market. The market is growing, but awareness of availability of finance has been very low," said Shubhasri Shriram, executive director of Chennai-based Shriram City Union Finance.

Unlike car dealers, a number of two-wheeler dealers across the country are complaining about lesser availability of finance from banks and also about a substantial increase in strictness of lending criteria by them.

"Banks have become very choosy about lending to two-wheeler customers lately. We are thus approaching NBFCs for loan who otherwise would have been third on our list," said a Mumbai-based dealer with Yamaha.

According to market experts, customers do not have any difficulty in paying their EMI on a higher interest rate charged by NBFCs compared with banks, as the net increase in actual payout is smaller because of the low average ticket size of the loan.

Finance providing companies such as Bajaj Auto Finance, FamilyCredit, Shriram City Union Finance and Fullerton India are cashing in on all the aspiring two-wheeler buyers whose application has either been rejected by banks or the interest rate charged are comparatively higher.

"The average difference is about Rs 75-125 per month on the higher side for the NBFCs, which is usually not a problem for the customer. The time taken by NBFCs to process the loan is also lesser than banks," added the dealer.

Also, many NBFCs have devised other ways to compensate borrowers. For instance, if a borrower has paid 12 instalments on time, many finance companies refund 0.1 per cent of the fee and borrowers can also pre-pay loans without a penalty.

In some cases, interest rates charged by banks are higher than what is charged by NBFCs. For instance, State Bank of India (SBI) is charging 15 per cent interest on two-wheelers, whereas FamilyCredit, a wholly owned subsidiary of France-based Societe Generale Consumer Finance, is charging 13 per cent.

Ramesh Iyer, managing director, Mahindra Finance, said, "NBFCs are present in places where banks are not, which is mostly in semi-urban and rural areas. Banks are definitely not as aggressive in lending to the two-wheeler category as before. This may be because of an increased activity in corporate lending which has made them reduce their focus on high-risk areas such as the two-wheeler segment."

To reduce risk, many NBFCs are doing "neighbourhood financing". They restrict the catchment of a branch to a radius of three or four km so that it's easy to stay in touch with the customer.

The passenger vehicles segment comprising cars and utility vehicles, however, does not have any such problems, according to a few car makers, at least for the time being. The risk involved in financing cars over two-wheelers is much lower and the average ticket size of the loan is also much higher.

Shashank Srivastava, chief general manager (marketing), Maruti Suzuki India, said, "The financed part of our sales has gone up to 68-70 per cent as compared to 62 per cent in the same period last year. The rejection ratio by banks has also come down for our customers." Maruti is the largest car manufacturer in the country with a share of 45 per cent.