Mumbai: Consumer finance companies are no longer aggressively chasing customers and actually reducing lending—barring one notable exception.
Even as companies such as CitiFinancial Consumer Finance India Ltd, GE Money Financial Services Ltd and Fullerton India Credit Co. Ltd are scaling down businesses on the back of the current economic slowdown, Muthoot Finance Pvt. Ltd, the finance arm of the Kerala-based Muthoot Group, is expanding its business by offering loans to customers willing to put up gold as collateral.
“Loans against gold are given at different interest rates —from 1.26% to 2.26% per month,” said Avinav Chaubey, head, marketing services, Muthoot Finance. This translates into annual interest rate of 15.12-27.12%, which is comparable with interest rates of traditional consumer finance firms.
Back-up security: A file photo of farmers checking agricultural loans waiver lists at a State Bank of India branch in Uttar Pradesh. Consumers in rural India often use gold as collateral to access loans. Harikrishna Katragadda / Mint
However, the lock-in period for a Muthoot Finance consumer is 15 days, unlike other financing firms that charge interest for at least six months in most cases. This means a consumer can borrow even for two weeks and pay interest for that period.
Chaubey declined to speak on margins that a borrower needs to offer to avail of a so-called gold loan. “It depends on the purity of gold,” he said. The minimum loan offered by Muthoot Finance is Rs1,500 and the maximum “can be any amount”, he said.
According to Chaubey, “individuals, traders and businessmen” are Muthoot Finance’s customers but he declined to divulge details, on the grounds that Muthoot Finance is an unlisted entity.
And Indians have enough gold in stock. Going by data put out by the Reserve Bank of India (RBI), physical assets, including real estate and gold, stood at Rs5,17,837 crore in 2006-07, in contrast to financial assets worth Rs4,67,985 crore of the total household savings of Rs9,85,822 crore. These are the latest available data.
The company is expanding even as the economy is slowing as Indian households are the largest owners of gold in the world. When conventional sources of funds dry out, consumers in rural India are likely to use the yellow metal as collateral to access loans.
The company operates at least 950 branches and services 25 million customers. For the fiscal year that ended on 31 March, it had posted a net profit of Rs63.10 crore on an asset base of Rs226.17 crore. Its business doubled in the year.
Non-banking finance companies (NBFCs) with traditional business models haven’t had similar success.
Ratings agency Crisil Ltd said in a November report that it noted a “sharp decline in the disbursement levels of non-banking financial companies over the past two months, as NBFCs have focused on repaying their maturing short-term obligations to mutual funds.”
Such decline in disbursements, it said, was as high as 70% in one case, with the average at around 50% for Crisil-rated NBFCs.
Sure enough, the balance sheets of NBFCs show a significant asset-liability mismatch. More than 50% of NBFCs’ borrowings have maturities of less than one year, while most of the assets have tenures of about three years, Crisil noted.
CitiFinancial, GE Money and Fullerton India had been focusing on the so-called subprime borrowers who typically have monthly incomes of about Rs5,000, but they have stopped lending to this segment with the rise in loan defaults.
GE Money, for instance, has stopped offering unsecured loans of up to Rs50,000, as well as two-wheeler and consumer-durable loans, to focus on safer asset segments such as loans against property and personal loans to the high-income group.
“The entire industry is currently facing very challenging conditions... We are responding to these market realities by cutting expenses, improving measures to reduce our risk... and tightening our credit underwriting,” a spokesperson for GE Money said in an email reply.
CitiFinancial, part of the troubled US financial company Citigroup Inc., too, has started diluting its focus on catering to the lower middle income segment or the “emerging middle class” with annual incomes of up to Rs1 lakh.
“The foreign bank’s consumer finance arm is in a transition phase and should be fine by June 2009 once the segmentation and rightsizing is done,” Sanjay Nayar, chief executive, Citibank NA, India and South Asia, said in a 21 November interview to Mint. “In the past one year, we have let go of about 400 people, which is reasonable.”
Nayar expects the consumer finance arm to be in order by mid-2009 and “become a multi-product engine serving the middle class of India”. Citifinancial has already cut the number of its branches by 100 to 350.
Fullerton India, promoted by the Singapore government’s investment arm Temasek Holdings Pte Ltd, has tempered its business growth in the country because of the liquidity crunch.
But in October, amid the global financial markets meltdown, Temasek reposed confidence in the venture by infusing an additional Rs250 crore in it, taking its total investment in Fullerton to $300 million (Rs1,503 crore).
Drop in loan applications
“In the last few months, the rate of personal loan application has dropped from 200 to 20 per month and we have stopped giving home loans due to liquidity crunch,” said a Fullerton India executive who did not want to be named as he’s not authorized to provide such information to the media.
In an email reply to Mint’s query, Fullerton’s official spokesman said the firm “operates in the urban mass market that is not adversely impacted by the slowdown. (But) due to a severe liquidity crunch for about 30 days, the company’s disbursals were lower than average.”
Fullerton has not been proactive in the home loan segment as it formed only 1% of its total disbursals, he added.
“The company continues to lend to small businesses, self-employed and salaried customers in its target market. This is the company’s main line of business and it continues to see a potential in the market and therefore will seek to consolidate its position in the retail financial services space. We have a customer base of half a million and we acquire 40,000 customers every month,” said the company spokesperson.
RBI has recently taken a series of measures to ensure funds flow from banks to this segment and help the consumer finance firms survive the liquidity crunch.
However, that has not enthused the rating agencies as yet. Indeed, Crisil has removed its “rating watch” on GE Money’s non-convertible debentures after the GE Capital Corp. decided against diluting its stake in the company, but it has said the outlook could be revised to negative if there is a significant deterioration in the credit risk profile of GE Capital, or a material change in the ownership of the finance firm.
CitiFinancial continues to be under “rating watch with negative implications” at Crisil. Its credit risk profile has weakened, mainly on account of a sharp rise in delinquencies in its small-ticket personal loan segment.