Consumer Finance Practice in India, Mechanics of Consumer Finance, Terms, Pricing

Demand for credit-fuelled consumption:

With India’s financial industry evolving at an unprecedented rate, demand for credit in the country has also seen consistent growth over the years. The rise in the ‘affluent middle class’ and growth in the rural economy is changing consumer spending patterns and driving the bulk of India’s consumption growth. India’s domestic credit growth has averaged 15.1 per cent from March 2000 to March 2021, primarily driven by retail loans and increasing penetration of credit cards. The Indian consumer credit market continues to expand at a rate higher than most other major economies globally with 22 million Indian consumers applying for new credits every month.

Increase in the purchasing power of an average Indian:

India’s consumption expenditure is more than double of that in countries like Brazil. The private final consumption expenditure has been consistently rising over the past five years and has reached INR 123.1 Mn (USD 1.70 Mn) in 2020. India’s household debt has grown at an annualised rate of over 13 percent in the last five years.

A shift in the demographic profile of the consumer:

India is one of the world’s youngest nations adding more working-age citizens every day. The new generation comprising of millennials and Gen-Z have better access to education, employment, and better incomes, leading them to break away from frugality and increased consumer spending. Along with the rise in income levels, consumers are spending on aspirational categories like lifestyle products, consumer durables, and jewellery. With India’s rising affluence, domestic consumption in the last decade has also increased 3.5 times from INR 31 Tn (USD 0.42 Tn) to INR 110 Tn (USD 1.50 Tn).

The rising role of fintech:

The most rapidly growing industry serving both consumers and businesses is fintech, who can be heralded as an innovation of the decade. When India’s financial services industry was once dominated by banks, fintechs created their own niche space by targeting customers from urban and rural regions who were rejected by banks due to lack of credit history or collateral. While introduce new innovative products, the fintech industry has also brought in the concept of ‘sachet packaging’ for easy access to financial products – available anytime, anywhere, and in any quantity. With rising customer expectations, the advent of e-commerce, and smartphone penetration, the Indian fintech ecosystem has grown manifold in the last few years.

Growth Trends:

• Unsecured Products have seen an increase in loan books at a CAGR of 38 per cent vis-a-vis Secured Products, which grew at a CAGR of 17 per cent from 2017 to 2020.
• With the increase in consumerism and financial institutions, the new sanctioned loans have surged between FY18 and FY20 at a cumulative growth rate of 39 per cent. Unsecured loans, being the major contributor, grew with an impressive CAGR of 49 per cent.
• There has been in an increase in expansion of credit to tier 3 and 4 markets for lending. These markets have witnessed a sharp rise in low-ticket high-volume lending products like two-wheelers, entry-level cars, and affordable housing. Meanwhile, metros remain the biggest lending markets given the skew of the working population.
• The Indian economy has bounced back faster than expected in the second quarter of 2020 to 21 with a contraction of 7.5 per cent. A V-shaped recovery began after April 2020 and the current financial year is expected to be one of high economic growth.
• Legacy banking systems are paving the way for new-age lending systems driven by technology that will offer customised financial products and services to the masses.
• The rise in incomes in rural India has led to growing demand within the micro insurance sector.

Different forms for financing consumers:

Cash Loan:

In this form, the buyer consumer gets loan amount from bank or non- banking financial institutions for purchasing the required goods from seller. Banker acts as lender. Lender and seller are different. Lender does not have the responsibilities of a seller.

Revolving Credit:

It is an ongoing credit arrangement. It is similar to overdraft facility. Here a credit limit will be sanctioned to the customer and the customer can avail credit to the extent of credit limit sanctioned by the financier. Credit Card facility is an excellent example of revolving credit.

Secured Credit:

In this form, the financier advances money on the security of appropriate collateral. The collateral may be in the form of personal or real assets. If the customer makes default in payments, the financier has the right to appropriate the collateral. This kind of consumer credit is called secured consumer credit.

Fixed Credit:

In this form of financing, finance is made available to the customer as term loan for a fixed period of time i.e., for a period of one to five years. Monthly installment loan, hire purchase etc. are the examples.

Unsecured Credit:

When financier advances fund without any security, such advances are called unsecured consumer credit. This type of credit is granted only to reputed customers.