India Knowledge@wharton: India’s consumer finance market could be slowing down

India Knowledge@wharton: India’s consumer finance market could be slowing down

In Mumbai, it’s hard to avoid billboards from companies such as GE Money, CitiFinancial Consumer Finance and Indiabulls Credit Services promising quick loans with minimal fuss. India’s retail lenders have been in high spirits in recent years for reasons that are easy to understand. But, as the subprime credit meltdown in the US shows, fast-growing financial markets often conceal hidden weaknesses. Signs have begun to appear that India’s consumer finance markets could be slowing down.

Bad bank loans, or non- performing assets (NPAs), are rising and could go up further. The State Bank of India—the country’s largest bank—saw gross NPAs increase to Rs10,760 crore in the quarter ended June 2007, from Rs9,720 crore in the corresponding quarter ended June 2006—the highest in the last 14 quarters.

The wide availability of unsecured loans against salaries—issued in amounts as high as 85% of an individual’s annual income—is one cause of the uptick in NPAs. Another is the race for market share by credit providers keen to justify their high market capitalization: It’s not uncommon to be accosted at a supermarket by sales agents wanting to sign you up for a credit card on the sole basis of your last credit card statement.

Meanwhile, rising interest rates have also pushed up defaults: Annual mortgage interest charges have risen from 7.5% to 12% over the last two years.

As non-performing loans and defaults rise, lenders are becoming cautious about their portfolios, especially loans to weaker borrowers. Firms are rethinking their strategies and re-examining risk management processes to ensure thatthey don’t face the kind of risks which have led some US financial institutions to go belly up.

According to Hemant Kaul, president of retail banking for Axis Bank, the minimum eligibility standard for the bank’s personal loans has now been raised from a salary of Rs7,500 to Rs10,000 a month. Many lenders are also investing heavily in software systems and appropriate processes that can help them contain the downside risks.

Why do products go from being ‘cool’ to passé?

The quest for cool is never-ending. However, there is also a fine line between cool and not-so-cool.

In a paper, Where Consumers Diverge from Others: Identity Signalling and Product Domains, Wharton marketing professor Jonah Berger and co-author Chip Heath from Stanford University explore the power of social identity in the demand for consumer products. Much of the existing research has focused on the drive for conformity among consumers—“but the process is more complicated than that", Berger says. “People want to do something similar to other members of their in-group but may diverge from that choice when outsiders start poaching that taste."

People make inferences about others based on the products they buy, and when lots of similar people adopt a product, it can gain meaning as a social signal. But, when a certain taste or product is adopted by people beyond the original group, it loses its ability to signal desired characteristics, according to the research. Berger and Heath also found that certain product categories—particularly clothes, music and products linked to social life—are more important in identity signalling than more “functional" products, such as pens or bicycle lights.

As new information delivery systems make the signalling process faster, product trends can explode across mass markets more rapidly than ever before, Berger notes. At the same time, the enormity of those markets can also turn off the original customer base.

Berger suggests marketers can develop or protect their brands by responding to both the trendy subculture that drives new tastes as well as the larger market that follows. One way to do that is to keep a brand “cool" by offering limited edition products appreciated by the trend-setters, but also produce mass-market versions. Marketers can also build barriers to protect a brand from over-saturation. “One thing brands can look to is adding to the cost of acquiring a signal—and not just in money," says Berger.

‘Privately smart and publicly dumb’: Games Indians Play

In his book Games Indians Play: Why We Are the Way We Are, V. Raghunathan writes about a farmer whose corn won top awards year after year. When asked about the secret of his success, the farmer attributed it to the fact that he shared his corn with his neighbours. Why would the farmer want to share his seed when those neighbours also competed with him for the prize? “The wind picks up pollen from the ripening corn and swirls it from field to field," the farmer said. “If my neighbours grew inferior corn, cross-pollination would steadily degrade the quality of my corn. If I am to grow good corn, I must help my neighbours do the same."

That Indians often fail to act like this farmer is the principal theme of Raghunathan’s book. Using examples as varied as their tendency to drive through red lights to their failure to protect the environment, Raghunathan argues that Indians often act in ways that focus on winning immediate gains at the expense of long-term benefits.

“Privately, Indians are reasonably smart—in fact, we are as smart as anybody else—but publicly we are dumb," Ragunathan said in an interview. “Our ability to understand the need for cooperation is very low. We believe cooperation and selfishness cannot go together—which is not true." What makes Raghunathan’s approach unusual is that his argument isn’t a moral diatribe: He employs game theory—a branch of mathematics—and related concepts, such as the prisoner’s dilemma, to present his case.

Raghunathan concedes that traits such as a lack of cooperation are found everywhere in the world, but he believes they are more pronounced in Indian culture. Why? “Part of our problem is that the regulatory environment is weak…. When we think we can get away with something, we tend to do whatever we want," he says.

As India’s economy improves and education spreads, he is hopeful that will change. “My question about why Indians are the way they are is a rhetorical one—it is an expression of my frustration.… I hope these ideas will encourage some introspection about how to make things better."

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Due to unavoidable circumstances, our fortnightly column from Oxford could not be carried in this issue. It will resume on 15 October.