Eight months earlier, it was vibrant business for Dream Finance, a Mumbai-based direct selling agent (DSA) which specialised in personal loans.
It employed 25 people to distribute these loans on behalf of various banks and non-banking finance companies. Today, the firm is down to six people and has shifted its focus from personal loans to less lucrative home loans.
Says Kalpesh Gohil, proprietor: “Personal loans have a much higher commission but because the market is quite bad, we started distributing mortgages around two-three months back.” He says business from personal loans had reduced to Rs 10-15 lakh a month from Rs 1 crore as recently as September 2008.
Although housing loans have a larger average ticket size than personal loans, they have much more stringent procedures and take thrice as long to process. Personal loans are generally unsecured and since they do not require a collateral, carry a higher interest rate as compared to secured ones.
Raj Naik of Arthyog Financial Services, another DSA based in Mumbai, has a similar story. Over the past six months, Naik has moved his agency to a smaller office to save on rent and reduced his staff from 20 to three. Around two months earlier, he also diversified into insurance products. “There are very few takers for both personal loans and housing loans. With insurance, I am just about managing to stay in business,” he says.
As banks and non-banking finance companies saw their retail loans, especially unsecured personal ones, turn increasingly sour, they cut their portfolios drastically.
According to Reserve Bank of India data, the growth in personal loans for the banking sector fell to 8.5 per cent for the 12 months to March 2009, compared to 13.2 per cent in the year-ago period. Between December 19, 2008 and March 27, 2009, the amount outstanding on personal advances fell by 2.5 per cent, from Rs 5,68,474 crore to Rs 5,55,392 cr.
For foreign banks, once among the most aggressive movers in the business, personal advances shrank by 8.1 per cent in the year ended March 2009, compared to a growth of 14.5 per cent in the previous financial year.
Once on the frontlines of Indian banking’s retail revolution, DSAs have had to deal with banks’ reduced appetite for loan applications. Says a senior executive from a foreign bank: “Banks have reduced their dependence on DSAs in recent months to save on origination costs.”
ICICI Bank, one of the largest players in the retail loan market, indicates that it sees a greatly reduced role for DSAs in the future, as it wants bank branches to drive this business. A Bank spokesperson declined to comment, but the extent of the pullback is apparent from the numbers. The bank’s expenses by way of commissions to DSAs dropped to Rs 53 cr in the fourth quarter of 2008-09, against Rs 358 cr for the corresponding period in the previous year. For the whole year, DSA expenses fell to Rs 529 cr, compared to Rs 1,543 cr in the previous financial year.
DSAs still in the business of personal loans have seen their approval rates plummet. Ram Niranjan, who diversified into insurance products a few months earlier, says the rejection rates for personal loans have spiked. Some banks now insist on dealing only with customers with whom they have an existing relationship.
Says Kalpesh Gohil of Dream Finance, “Our approval rates have dropped from over 50 per cent only six to eight months ago to 15-20 per cent today.
Not everyone has chosen to diversify his or her product range. Once a team manager with a big direct sale agent (DSA) for loans, Andheri-based Samar Shelar decided three years ago to strike out on his own and opened S S Enterprises. Ten days earlier, after repeatedly reducing his staff numbers over recent months until he was left with just three people, Shelar decided to close.
“I could have continued but my monthly turnover had fallen to Rs 20-25 lakh a month, compared to Rs 70 lakh to Rs 1 cr eight months ago,” he explains.
When asked why he opted not to diversify into other products, he says too many people are getting into distribution of insurance products and the space is sure to get crowded.
