Rich pickings in loans to poor

Banks offer loans at 30-40% interest without collateral.

Banks and finance companies are increasingly finding it lucrative to lend to people who do not qualify for a credit card, have no credit record or collateral to offer and have incomes that make them ineligible for a regular loan.

On offer are small-ticket personal loans (STPLs) for amounts up to Rs 50,000 at interest rates that range from 30-40 per cent per annum.

Many of the big boys of high finance have joined the bandwagon, though there are no estimates of the size of the business or of the rate at which it is growing.

While CitiFinancial and GE Money are widely recognised as the market leaders in the business, Standard Chartered has just announced its entry. ICICI Bank got into the sector a few months ago.

HDFC Bank is planning to extend its reach in this segment through its yet-to-be launched subsidiary. Amongst the finance companies, IndiaBulls began pushing small-ticket loans earlier this year.

"It is a profitable business. Most of our personal loans portfolio consists of such loans. This segment has been traditionally ignored by the banks," says Gagan Banga, IndiaBulls' head of marketing and retail loans.

The processing of a loan application takes anywhere between 24 hours and 3-4 days, though the approval ratio at 30-40 per cent is much lower compared with 70-75 per cent in the case of normal personal loans.

"The most reliable way to judge the borrower is to meet him," says B Madivanan, head of credit cards at ICICI Bank. Formalities like submitting three years' tax returns are not insisted upon.

The interest rate on such loans is generally a flat 1.99 per cent per month and the tenure ranges from 12-18 months with the borrower being more sensitive to the equated monthly installment (EMI) than the interest rate.

Unlike regular loans which target people having a minimum salary of Rs 9,500 per month, the STPL market targets borrowers typically earning between Rs 5,000 and 10,000 per month.

The risks for the banks are high, but so are the rewards. For some bankers, it is a good way of extending the market to new customers.

"The business thrives on repeat customers. A new customer with no track record is charged a higher rate but the next time when he needs a loan, he invariably comes back to us and qualifies as a regular borrower at a lower rate of interest," says PR Seshadri, managing director of CitiFinancial Consumer Finance India.

"It is a largely untapped market and there is room for more players," says Neeraj Swaroop, CEO, Standard Chartered Bank India. Standard Chartered Bank plans to tap the market through its subsidiary Standard Chartered Investments and Loans (India).

The number of branches giving out such loans is expected to go up from one to 10 by the end of this financial year and touch 100 by December 2006.