India's subprime market proves a prime opportunity

MNCs, local players rush to complement conventional banking.

Like the US, India too has a subprime market and it is booming. The success of early entrants like Citi Financial and GE Money has encouraged several others to enter the consumer lending business, nearly half of which is a sub-prime market.

These include players like HSBC (Pragati Finance), Stanchart (Prime Financial), Fullerton India, DBS Cholamandalam and Indiabulls.

Many more are coming. Industry sources say Barclays, Deutsche Bank and AIG are eyeing the segment, which includes private lenders like ICICI Bank and HDFC Bank, which entered in 2004.

What's attracting them is an estimated $10-11 billion market for unsecured credit, which is growing at 25-30 per cent, according to Citi Financial Managing Director Sandeep Soni. The smaller players are growing at 50 per cent or more.

''The non-banking finance companies or NBFCs are riding on the aspirations of people who were under-served by banks,'' said Soni.

''It's an untapped market. There's an opportunity to expand the market like in telecom,'' said Rajeev Yadav, head of personal loans at GE Money. Subprime has become a dirty word, so many multinationals in India call it a near-prime market and refuse to draw parallels.

A typical subprime customer is the self-employed, neighbourhood retailer or a trader who needs credit to buy goods and grow their business. He may be filing a tax return (most show an income of Rs 70,000-80,000), but it doesn't truly reflect his cash flows. ''Many of these people do huge business in cash; there's no way it can be registered on paper. We use a lot of surrogates to estimate their income or cash flows,'' said Biju Pillai, business head, personal loans, HDFC Bank.

Take an auto mechanic, who comes to borrow, say, Rs 25,000. Lenders like GE Money will look at surrogates like his bank balance or his credit card records or visit his shop to estimate his income. ''If he maintains an average bank balance of Rs 2,000-3,000 and that's increasing or services an EMI of Rs 1,500 on credit card or another loan, it shows he has cash flows. Banking tells us about a guy's character, about his cash flows. His ability to service an existing loan or an EMI indicates his credit-worthiness,'' Yadav added.

Typically, these are customers who have very little income to show on paper or don't have very good banking "" a shop-keeper could maintain kaccha book. ''You can't expect people to have either of the two where only 30 million people file tax returns and most of the economy runs on cash,'' said a senior executive with an NBFC.

To expand their pool of customers, companies like GE Money run pilots to test various surrogate programmes (based on income, quality of bank statements, earlier loan or field verification).

At any given point, these companies have five to six surrogate programmes running.

Customers for NBFCs also include salaried people and professionals like doctors and chartered accountants, who are prime customers.

A salaried employee could be a BPO executive earning Rs 8,000-10,000 a month who wants to buy a bike, a mobile or a PC. The customer could also be a blue-collar worker who wants to do up his house or buy a refrigerator or TV. Many of these are first-time borrowers.

"Earlier, people were averse to taking credit but that's changing. Today, people are confident of leveraging themselves. They want to have a lifestyle that they can service over time," said a senior executive with an NBFC.

In the absence of credit history, companies like Citi Financial have built a database of customers by providing loans for two-wheelers, television, washing machines, TV and mobile phones, on which they don't make much money. "This is the best way of getting customers on board and create a pool of tested customers," said Soni.

The average ticket size for these loans is Rs 25,000 but could go up to Rs 1 lakh. They come with a term of 25 months and interest rates of 45-50 per cent. But the high cost of operations and sourcing (10 to 15 per cent) and defaults (5 to 15 per cent) partly negate the margins.

But as most players are still in investment phase and expanding their reach "" Citi Financial has added 450 branches in 200 cities while GE Money is present in 102 cities "" experts say few make money.

"It's a tough business. You need to get the model right. You got to have the appetite for losses. Getting the right customers is an expensive proposition," said Soni.

As the market becomes competitive, the NBFCs are also trying to reach out to new customers. As with credit cards, the NBFCs were extending multiple loans to the same people.

"Everyone was trying leverage people who had borrowed earlier as that was the easiest way to get into the market," said HDFC Bank's Pillai. "If people are not careful, they could be over-leveraging customers," added Citi Financial's Soni.

While it is true that NBFCs have been around for decades and have been at the centre of many scandals, the current players are seen to be "serious, long-term players, and not fly-by-night operators," as a banker put it.

"But there seems to be a gap in regulations that needs to be plugged, he added. While Indian and foreign banks need licences to open branches, NBFCs have been opening branches and disbursing credit," he pointed out.

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India's sub-prime market: How different?

The subprime crisis in the US is in the mortgage market, in which people used rising value of their assets to raise second mortgages. No second mortgages are allowed in India

In the US, subprime borrowers are people who have and defaulted on their mortgages; many people in Indian subprime are first-time borrowers

In India, the subprime market consists of small-ticket personal loans of less than Rs 1 lakh. The average ticket size is around Rs 25,000-32,000. These work like a starter loan.