At a recent annual general meeting of a rating agency, several agitated shareholders suddenly began to express their anguish at usurious interest rates charged by credit card companies and their brutal recovery tactics. It had nothing to do with the rating company, its performance or its results; its investors were merely giving vent to their anger and hoped the rating agency would persuade the government to introduce some checks & balances in the retail lending business.
At Abhay, the credit counseling centre set up by Bank of India in Mumbai, a senior banker says that most complaints pertain to credit card usage, or the inability to repay swiftly disbursed personal loans or consumer loans by non-banking finance companies (NBFCs) that are proliferating at an incredible speed. Many of those seeking counseling are people with annual incomes of Rs 2-6 lakh, or those typically classified as sub-prime borrowers, and are usually clueless about the actual interest rates they pay. Some of them have as many as four or five credit cards, indicating poor due diligence by the card issuer. However, the lenders’ risk is apparently mitigated by fairly usurious interest rates that can go as high as 40%. These rates are often more than what the friendly neighbourhood moneylender would charge, since he is subject to statutes governing usurious lending rates, while the aggressive new finance companies floated by banks and MNCs are allowed to retain opaque lending policies.
The former chairman of a large public sector bank, who offers credit counseling to distressed borrowers, says there is both bewilderment and simmering anger among people; the system will have to find remedies soon or deal with the consequences.
However, the finance companies that are fuelling retail indebtedness and stock market speculation are quite pleased with themselves. At a time when corporates are able to raise cheaper credit outside the banking system, retail lending keeps their bottomlines healthy. Their interest rates, which range from 18 to 40% (depending on borrower classification), make up for the financial risk and high default rate that persists despite recovery tactics that include brutal intimidation and threats.
The role model here is the stupendous success of Citi Financial, which has over 10,000 employees and 400 branches around the country, and still growing; or success stories such as GE Financial and Stanchart’s Prime Financial, which maintain low profiles. Many operators want to replicate this strategy and operate outside the RBI’s scrutiny. Then, there are global firms such as Fullerton India Credit Company (subsidiary of Temasek, Singapore), AIG Capital, BNP Paribas and Societe Generale that want to give the leaders a run for their money. Well-funded brokerage firms are players, too. Their clout comes from hundreds of branches across the country that fund retail and high-networth speculation. Another category would include retailers such as the Future Group, which is perfectly poised for this business with an almost captive customer base.
Last week, the RBI cleared HDFC Bank’s long pending application to set up a finance company that will take over the retail finance business. The bank insists that the regulatory advantage that exists today may soon vanish, but it will clearly have more flexibility in expanding its geographical footprint.
The rush into retail financing makes it pertinent to remember that the South Korean credit card crisis of 2004 saw a whopping four million people default on credit card bills to the extent of $6 billion
It is indeed a high-risk business, but the returns are high enough to allow financiers to be really slack about credit assessment. Consider this example. Umesh Gosar’s credit card company mailed him a loan document of Rs 50,000 along with a draft of Rs 38,000, although he had neither sought the loan nor consented to it. The credit card number on the documents also did not belong to him, although the name was correct. In their hurry to deliver credit and set the interest clock ticking, the bank and its agents clearly have no time for any cross-checks and verification. Sanctions and disbursements take less than 48 hours in this business, with some finance companies even promising that you can walk into a branch and walk out with a cheque.
Retired bankers involved in credit counseling say that the RBI needs to cap interest rates, mandate transparency in borrower classification as well as interest charged, and increase provisioning norms in segments that clearly cater to high-risk borrowers. Their experience with distressed borrowers shows that cash withdrawal on credit cards is another big worry, because people who use this facility are usually unaware that it operates differently from normal credit card spending. Cash withdrawal, for instance, attracts immediate interest and has to be paid back separately.
The rush into retail financing makes it pertinent to remember that the South Korean credit card crisis of 2004 saw a whopping four million people default on credit card bills to the extent of $6 billion. The post-crash analysis revealed that cash advances and loans accounted for nearly two-thirds of the transaction volume. In Korea, the crisis was caused by feeding peoples’ gullibility and was ultimately resolved through a $4 billion bailout. In the US, aggressive lending to high-risk sub-prime borrowers, which is driven by the urge to increase profits, is being examined by a Senate sub-committee. In India, the regulator has often acted in time to deflate a high-risk bubble, as it did with the realty industry. But the early warning signs are clearly visible.