Mumbai: The business of giving loans to customers with a poor credit history has shocked credit markets across the world. The US Federal Reserve estimates losses of $100-150 billion (Rs3.93-5.89 trillion) so far and this could be just the tip of the proverbial iceberg. Indian non-banking financial companies (NBFCs) are in the business of lending unsecured small-ticket loans to so-called subprime borrowers. Industry analysts estimate the size of this segment to be around $8-10 billion, even as the players are wary of disclosing their assets. Credit losses are estimated to have increased to 10% of assets as the players have become aggressive.
P.S. Jayakumar, country business manager, global consumer group, Citigroup India, says the comparison with the US is unfair and that there is no subprime in India. According to Jayakumar, CitiFinancial, the NBFC arm of Citi, is insulated from the fallout of the global subprime crisis. The NBFC has assets of Rs9,400 crore and caters to 2.5 million customers across the country from 450 branches. The level of non-performing assets (NPAs) is under 3% of the total loan portfolio. Though there have been cases of overleveraging the Indian consumer, Jaykumar says, in an intervieew with Mint, that the situation is not alarming and there are opportunities galore. Edited excerpts:
Citigroup is expecting a $1.3 billion loss in subprime mortgage-backed securities. What’s the scene in India ?
In India, there is no subprime. NBFCs are trying to provide credit to the underserved and untested segments of the society. CitiFinancial continues to remain an independent AAA-rated non banking financial company. We are one the few AAA-rated and possibly one of the largest NBFCs in India today.
Is there any move to strengthen risk management here ?
Although strengthening of processes is a continual exercise for us, we are more watchful now. We spend more time in meeting the customer and if required ask for additional documentation. We have always been a great believer in the use of the credit bureau. Besides, through our experience of being in this business over the last many years, we have developed good analytics and statistical models that give us the behavioural score and the credit history of our customers. Being a large player in this field, we do realize our responsibilities.
While sanctioning small ticket loans our motto is “Don’t lend. Educate”. Our approach is systematic and we always meet the customer to understand her needs and advise her on using credit wisely. We start with the income of customer and enquire about the expenses she has. Taking into consideration her expenses, we advise the customer to take a loan, which she can efficiently service and ensure that her monthly instalments do not exceed 70-80% of her surplus.
But credit losses have been on the rise. Isn’t over-aggression leading to such losses?
A large number of players have come in recently. The supply side has significantly increased mostly around the same locations such as the metros and mini metros in India. While we do have a credit bureau in India, which is increasingly becoming more effective, I am not sure if it has found widespread usage among the newer players.
There have been instances of overleveraging the customer. Some lenders may not have done enough due diligence and in some cases there may not have been enough documents to prove the credit-worthiness of the customer. Also, some lenders use a remote risk assessment model through direct sales agents.
A combination of these two-three factors could have led to overleveraging, which has led to some amount of losses in this sector.
What is the extent of losses for CitiFinancial ? Our balance sheet is Rs. 9,400 crore and we have approximately 15% market share. We have a robust portfolio and our NPAs are well within tolerance levels. On our small-ticket loans our NPA level would not exceed 6-7%. In good times it is 3-4% of the asset size.
These markets have a certain degree of volatility and I do not think there is such a cause for concern. There may be a problem of overleveraging because of new entrants but it is much contained and the industry as a whole will be able to tide over it quickly. One has to understand why these unsecured loans are principally short-term loans with a 12-36 month tenure. If there is a problem, it will start easing off quickly and stability will be restored. We hope the existing players and new entrants will now become more watchful and sanction new loans with greater diligence. If you look at it in the long term, nothing has changed. The opportunity still exists. There are more young people in the job market; income levels are rising; and people’s aspiration to use credit is growing. We continue to invest and grow in this business.
There have been allegations that some of the NBFCs are reckless…
About 55-60% of our clients are self-employed and use the loans for legitimate business purposes. Others use it for genuine household reasons such as education, marriage, house renovation and other emergency purposes. There will always be some customers who will misuse credit but this is an inherent risk in the lending business.
Recent trends seem to indicate that a few aggressive lenders and new entrants in the market, in pursuit of market share, may have overextended the customers. We hope that they will take the necessary steps to correct the situation.
Interest rates are already very high in this segment. Would you raise it further to take care of increasing bad assets?
The cost of funds has risen over the past two years. The average rate of interest for a first-time borrower is around 30-40% on small-ticket loans of less than Rs 50,000. Raising interest rates is not a solution but one has to realize that the cost of processing of such loans is also very high.
But I think the risk reward relationship in India is much more favourable compared with similar markets such as Hong Kong.
What differentiates you from your peers ?
Our differentiation is the personalized, advisory approach that we follow. A trained CitiFinancial officer personally meets each and every customer.
We reward customers who have a good credit history and encourage them to be prudent in availing of and using credit. Majority of our customers are repeat customers or are referred to by their friends or relatives who have had a pleasant experience in dealing with us.
The role of our direct sales agents is extremely restricted and they just guide the customers to the branch.
If for any reason, a customer cannot pay as per what she had originally agreed to pay, we offer options to help her restructure the loan by increasing the tenure and changing the EMI. Our objective is to assist the customer in meeting her obligation in a convenient manner so that she is able to maintain a good credit history.
As we undergo an economic transformation, we must understand that access to finance is key to development. Citizens need to be encouraged to maintain a clean repayment record, especially with with the advent of credit bureaus where adverse negative credit history will impact a citizen’s future ability to borrow from institutions.
Despite all of this, your credit losses have been on the rise...
When a customer gets overleveraged, it impacts prudent lenders like us as well. However, our losses are well within our acceptable limits. We do hope that learning from this experience, industry players will become more diligent while lending and also use the credit bureau more effectively.
Recently banks have drawn criticism regarding their collection system. What are your thoughts?
We believe collections are important and must be done consistently, respectfully and professionally. It helps the customer to maintain a good credit history. At Citi, our collections policy is built on courtesy and fair treatment.
We have a clearly defined code of conduct for collections, which is strictly adhered to by all staff and vendors.