Monday, 4 August 2014

Your Credit Scores Are Driving Boom In Unsecured Loans

MUMBAI: Unsecured personal loans, which had all but disappeared after record defaults in 2007-08, are making a strong comeback, thanks to the Credit Information Bureau of India's (Cibil) real-time credit scoring. Also expanding the market are new intermediaries who are generating leads that help lenders go beyond tapping walk-in customers at retail chains. 
Consumer loans on equated monthly instalments started picking up a couple of years ago, initially through credit cards. The EMI sales were also driven by subvention from the dealer or manufacturer who agreed to bear the interest cost but not the credit risk. Card companies were the first to tap this opportunity. But considering that there are only 1.9 crore credit cards in circulation, the market is quite limited. Lenders such as Bajaj Finance, Capital First, and Fullerton have expanded the market by putting up their loan desks within retail chains. 
"In 2007, most finance companies did not have a clue of who the borrower was. The loans were disbursed on the basis of documents filed by the borrower. We found that in some case even Form 16 documents were fake," said the chief of a finance company. 
He added that loans were pushed by agents who had an incentive to get disbursements which created a moral hazard, resulting in the rise of bad loans. What has changed now is that the lenders are now able to identify how leveraged the applicant is; they can also identify in five minutes if the borrower had missed out on any loan instalment in the past. 
Besides finance companies, banks too are scaling up their consumer loan business. According to the latest RBI data, outstanding consumer loans on April 28 stood at Rs 13,700 crore, up 60% from Rs 8,600 crore a year ago. These consumer loans are typically those availed for making small-ticket purchases such as washing machines, flat screen televisions or laptops. Among finance companies, Capital First's consumer loan book has almost doubled from Rs 1,821 crore in last March to Rs 3,593 crore in March '14. Bajaj Finserv has seen its consumer loans disbursements rise 36% to Rs 13,360 crore in FY14. 
Lenders are able to take a decision within minutes because they are able to pull down an individual's credit history within five to seven minutes and find out the extent of loans and the level of delinquency. "We now have credit history information in respect of 330 million accounts in our repository which includes information from 350 cooperative banks and over 300 regional rural banks," said Harshala Chandorkar, senior VP, Cibil. "Besides drawing the credit scores from Cibil, the lenders have systems where their credit policy is built into the software. This allows them to disburse loans instantly," she added. 
Expanding the market to tier II centres are a new set of intermediaries. Onemi India, which initially started as a catalogue mail order firm, retailed consumer goods at EMIs by tying up with card companies. With a customer base of 2.5 lakh, Onemi has now raised $5mn in private equity funding from Venture East. It is now targeting loans of Rs 385 crore during FY15. 
"For the lenders the last mile is always the problem. What we do is conduct the due diligence on behalf of the lenders at the applicants location. Besides earning from generating leads for lenders, we are also looking at whether we can underwrite some of the credit risk," said Abhijit Bhandari, director and founder of Onemi. The company is now looking at raising more capital which will be invested in warehouses and logistics. 
"We are also looking at selling to customers of microfinance companies. Since MFIs can lend only in income generating segments we are looking at retailing goods such as inverters and bicycles. Our research has shown that there is also a great demand for laptops even in rural areas," said Bhandari. While banks continue to find it a challenge to lend to the new-to-credit segment, finance companies and intermediaries like Onemi see this as a big opportunity. 
Besides getting information on borrowers, Cibil is now trying to enrich its database by including repayment profiles of those who have never availed of a loan. The credit scoring agency has sought permission from the Reserve Bank of India to obtain payment track record in respect of utilities such as telephone bills and also in payment of insurance premium. "The telecom companies have expressed their willingness to share subscriber credit records. They are already using Cibil credit records for fixing credit limits for post-paid subscribers," she said.

Credit Sudhaar is India's first Credit Health management & improvement company whose goal is to help clients to Restore, Enhance and Protect their Credit and make them credit healthy.

Courtesy: Times of India

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