Banks sniff big profits in small loans

More and more banks are sensing big opportunity in the high-margin, small consumer loans business.

The latest to go the whole hog is Standard Chartered Bank with the appointment of Pavan Dhamija of GE Money China as the head of its consumer finance in India.

Standard Chartered joins Citifinancial and GE Money, the other two foreign financial services majors, in providing consumer loans. Standard Chartered will advance the loans through its existing non-banking finance company (NBFC) subsidiary, Standard Chartered Investments and Loans, and will brand it Prime Financial.

Hongkong and Shanghai Banking Corporation (HSBC) had recently launched its small loans business within the bank, as it could not wait till it received an NBFC licence from the Reserve Bank of India (RBI).

ICICI Bank recently decided to lower the minimum size of loans it would grant to Rs 10,000 from Rs 20,000, as it found small loan-seekers to be bankable.

Dhamija, who would be the CEO of Prime Financial, was the operations director and part of the core team that built the GE consumer finance business from scratch in China.

His mandate at Standard Chartered is to build a strong franchise in India and make Prime Financial a leading provider of financial solutions with a broad product suite.

Standard Chartered had launched the Prime Financial brand in late-2005, but its activities have been a low-key affair so far.

The consumer loans business has high delinquency rates, but the interest rates charged are much more than the cost of defaults. The interest rates charged are as high as 45 to 50 per cent.

Citifinancial Consumer Finance India's net profit has improved to around 5 per cent from around 3 per cent in 2003-04, primarily because of a shift in the assets mix towards high-margin products, such as personal loans and home equity.

Its net profit in 2005-06 was Rs 170 crore against Rs 130 crore in 2004-05 and total income in 2005-06 was Rs 1,170 crore, up from Rs 730 crore a year earlier.

GE Money also finances consumer durables and two-wheelers and disburses personal and mortgage loans. GE Money had a net profit of Rs 54 crore on a total income of Rs 794 crore in 2005-06.