Consumer Finance: Role of

consumer credit in the Financial

system

4.1
 Types of Finance Companies
– Consumer finance; direct personal loans with or
without collateral and credit cards

– Business finance; buying installment sales

contracts
• Consumer Loans
– Banks now dominate in this area (1991) 72% versus 28% for F.C.s
– Many finance companies have entered second mortgage markets
• Home equity loan
• Tax Reform Act of 1986 ended deductibility of non-mortgage interest
• Business Loans
– Factoring; buying receivables from manufacturers
• Recourse is important aspect of factoring
• Can be a very expensive way to obtain immediate cash flow
– Leasing to mid-size companies
• Loans secured by asset leased. Repossess if default
• Tax benefits (depreciation) accrue to F.C
• May also provide for exchange of tax benefits via lower rates
• Consumer Finance companies face the same
risks as Banks and Thrifts
– Liquidity risk
– Interest rate risk
– Credit risk
 …driven by a growing consuming
class…
2000:
2000:Per
Percapita
capita 2007:
2007:Per
Percapita
capita 2015:
2015:Per
Percapita
capita
GDP
GDPUS$
US$500
500 GDP
GDPUS$
US$1,000
1,000 GDP
GDPUS$
US$1,500
1,500

Consuming
Consuming Consuming
Consuming
class Consuming
Consuming
class 35% class
class 70%
population class
classpopulation
population
population growth population
population growth
estimated estimated
estimatedat
at
estimatedatat estimated
estimatedatat about
about600
600mn
1
about 260 mn 1
about mn1
about350
350mn
1
about 260 mn1 mn1

 From per capita GDP of US$ 1,000 to US$ 1,500:

consuming population to grow manifold

1. Estimates based on NCAER data. Consuming

class comprises middle and high income 6
6 households
 …with an upward migration of
incomes..
(households in million)
FY2010
FY1996 FY2002
Estimate

Middle income 33 50 98

High income 1 3 10
Middle income : US$ 2,100 -11,670 per household p.a.
High income : > US$ 11,670 per household p.a.

 Rising affluence and growth of the consuming class

 NCAER data for top 24 cities in India shows
migration to higher income levels growing at over
40% per annum

7
 ..and low market
Life Insurance Penetration
penetration..
Mutual Funds Penetration

M u tu a l Fu n d s a s a % o f G D P
Life insuranc e pe netratio n & pe r c apita (2006)
6 00 0 14 .0 % 60%
13.1%
12 .0 %
5 00 0
5,140
50%
9.2%
8.3% 10 .0 %
4 00 0 7.9% 40%
8.0 %
Insurance per capita (USD)

Insurance penetration
3 00 0 2,829 30% 21% 19%
2,456 5.4% 19%
4.0% 6.0 %
4.1% 20%
2 00 0 1,617 3.2%
1,480 4.0 % 8%
1.7% 4%
10%
1 00 0 2.0 %
1,790
189 34 33 0%
0 0.0 %
UK Japan Ho ng Ko ng US S ing ap o re Ko re a Malaysia China Ind ia China J apan HK Kore a India
Source: Swiss Re Source McKinsey

Mortgage Market Penetration

• Retail Credit / GDP at 13% as 80%

Mortgages as a % of GDP
62%
compared to 60%* in Malaysia &
60% 49%
90%* in the US 37% 38%

• 113 mn people are likely to retire 40%

17%
by 2016 20% 7%
– Need for retirement planning now
0%
USA HK Euro p e Sing China Ind ia
Source McKinsey

* At the end of 2005, Source IMF 8

 ..offering banks a huge
125.00
opportunity..
US$ bn
30% 114
100.00
40% 88
75.00
62
50.00

25.00

-
2005 2006 2007

Ho u s in g Lo a n s Cre d it Ca rd Au to Lo a n s Oth e rs

• Robust growth in consumer credit in India

– Across product segments
• Growth to moderate to 12-15% due to the large base effect

Source: Reserve Bank of India

9
 Key challenges at the time of
entry into consumer finance
• Well entrenched competition
• Change in mindset required
– Focus on decentralisation & empowerment
• No experience in consumer finance
– Finding the right way to approach the market was a key
challenge
• Lack of scale
– Low relevance for intermediaries and vendors
• High cost of funds
• Creating a retail organisation
10