CHAPTER

1
INTRODUCTIO
N

1.1 General Introduction of the Topic

It refers to the raising of finance by individuals for meeting their personal expenditure or
for the acquisition of durable consumer goods and for the purchase /creation of an assets.
This is directly related with the money lending to the people or the consumers. consumer
finance are in the best interests of the consumer.

Consumer finance has to do with the lending process that occurs between the consumer
and a lender. In some instances, the lender may be a bank or financial institution. At other
times, the lender may be a business that off ers in house credit in exchange for the
business of the consumer. Consumer finance can include just about any type of lending
activity that results in the extension of credit to a consumer.

The consumer finance is a win-win system in which every one wins. For the consumers
it is an opportunity to upgrade standard of living here and now instead of waiting for
years of savings to accumulate. For manufacturer, consumer finance stimulates demand
and brings down inventories. For dealers it is one type of sales booting. For finance
company it is profit generation.

As with any type of financial arrangement, it is important for the consumer to understand
the exact nature of the commitment that is made as part of any consumer finance strategy.
By understanding and accepting the terms and conditions associated with any lending
situation, the consumer is pledging that the ability to repay within terms is present, and
that the consumer has every intention of complying with each component or section of
the loan agreement. To this end, it is in the best interests of the individual consumer to
seek out the most desirable arrangements for any type of consumer finance, taking care to
avoid any situation that will place an undue amount of stress on the resources in the
possession of the consumer

1
1.2 Objective of the Project

To study in detail the concept of consumer finance

To study the types of consumer finance
To study the major areas of consumer finance
To study the sources of consumer finance
To know which companies are into consumer finance
To study the consumer finance as a services
To study the risk involved in financing

2
 CHAPTER
2
REVIEW OF
LITERATURE
` Consumer finance a major growth area' by Priya Nair Dec 02, 2005

A RECENT poll by Asia Money has ranked HDFC Bank as the number one bank in India
in categories such as customer service, back-office or post trade finance, competitive and
prompt spot pricing, forex options provider for non-Asian currencies, currency strategy
provider and technical analysis.

The latest issue of the Asian Bankers Journal ranks HDFC Bank at No 7 in the list of
strongest banks. In an interview with Business Line , Mr Aditya Puri, Managing Director,
HDFC Bank, speaks of the concerns facing the banking industry and the bank's strategies
for growth. Excerpts.

Most banks are now focusing on retail growth. HDFC Bank's retail loans too have
grown over 70 per cent in the second quarter this year. Going ahead, from where do
you see more growth?

Seventy per cent growth was an aberration because we were starting from a small base.
As our business grows, the growth percentage will come down. But, we will keep
growing.

Consumer finance opportunity in India is one of the best available anywhere in the world.
Sixty-four per cent of our GDP is domestic consumption-based. We have the youngest
population in the world, demographics are changing, types of jobs are changing, and now
we are talking about reforms which will lead to further impetus to consumer dynamics.

In addition, our loan to GDP for consumer loan is 6 per cent; in most developed countries
it is 100 per cent and in marginally developed countries it is 40 per cent. So consumer
finance will continue to be a major growth area.

3
 CHAPTER
3
CONSUMER
FINANCE

3.1 Meaning of Consumer

An individual who buys products or services for personal use and not for manufacture or
resale. A consumer is someone who can make the decision whether or not to purchase an
item at the store, and someone who can be influenced by marketing and advertisements.
Any time someone goes to a store and purchases a toy, shirt, bever age, or anything else,
they are making that decision as a consumer.

3.2 Meaning of Finance

In general term finance means management of money for your expenses. In broad term
finance is the science of funds management. Finance includes saving money and often
includes lending money. The general areas of finance are business finance, personal
finance, and public finance. Finance is also a money budget management. The field of
finance deals with how money is spent and budgeted. It also deals the concepts of time,
money and risk and how they are interrelated. Finance is used by individuals as personal
finance, by governments as public finance, by businesses as corporate finance, as well as
by a wide variety of organizations including schools and non-profit organizations.
Finance is the need of the today world economy

3.3 Meaning of Consumer Finance

The division of retail banking that deals with lending money to consumers. This includes
a wide variety of loans, including credit cards, mortgage loans, and auto loans, and can
also be used to refer to loans taken out at either the prime rate or the subprime rate.

4
3.4 Meaning of Consumer Finance Company

A financial institution that specializes in providing loans directly to consumers who are
unable to secure bank loans. A consumer finance company generally charges a higher
interest rates than a bank.

3.5 Types of Consumer Finance

There are various types of Consumer Finance. Some type of Consumer Finance arises
from the purchase of high priced items. Some form of Consumer Finance, in which
lending institutions especially a bank approves a predetermined credit.

TYPES OF CONSUMER FINANCE

Based on Based on Approval Based on

Schedule for for Money Mode of
Repayment Transaction Payment

Installment Single or Direct Retailer

Payment Non- An Closed Money CF CF
Installment Open- Ended
Payment ende d CF
CF

30 days Revolving Bank

Check Installment CF CF Credit
Credit Plan Plan Cards

5
The types of consumer finance can be categorized as follows:-

A. Based on Schedule for Repayment:

It has further divided into two types of consumer finance.

I. Installment Payment:
This Consumer Finance usually arises from the purchase of high priced items viz., TV,
washing machine, and freeze, etc. The buyer does not have to pay the entire amount at
once. Repayment is then made in installments over several months until the debt is
retired. The number of months may be 6, 12, 24, and 36 as case may be.

II. Single or Non-installment Payment :

According to this scheme, customers are required to repay entire debt in single or one
payment.

B. Based on Approval for Money Transaction :

This type of Consumer Finance is further divided into two types of consumer finance:

I. An Open Ended Consumer Finance :

It is available up to some pre-set amount without approval for each transaction. The
borrowers may apply for initial approval from a lender agreeing to the terms of the
Consumer Finance and repayment.

Generally, after approval customer receives an identifying number that can be used
whenever customer needs credit. Example in this categor y of consumer finance is credit
cards.

II. Closed Ended Consumer Finance:

It requires approval for each transaction. That amount can be added to the previous credit
financing without a new agreement between customer and lender.

6
C. Based on Mode of Payment :
This type of Consumer Finance has been also further classified into two subtypes as
follows:

I. Direct Money Consumer Finance:

This Consumer Finance is extended to consumer by lending agencies of finance
institutions. The consumers can use the borrowed money to purchase the desired items.
The various plans available to consumers in this category of Consumer Finance are as
follows:-

a) Check Credit Plan :

It is a form of open-ended consumer finance, in which lending institutions especially a
bank approves a predetermined credit. When customer overdraws account, it
automatically triggers to loan. So long as the payment schedule is met and authorized
limit of Consumer Finance is not crossed customer can continue to increase the loan.

b) Installment Loan :
It is often used to meet needs over a longer period than the single payment loans for
several years like1, 2 or 3 years. Periodic payment tries to match customer s ability to
repay with size of the loan to be satisfied. Finance char ges for these loans depend on the
source, amount and timings of loans as well as value of collateral offered.

II. Retailer Consumer Finance :

The retailer Consumer Finance is directly related to sale of product. Seller of goods and
services offers it. The retailer Consumer Finance has been further classified into three
categories as follows:

a) 30 Days Consumer Finance:

The amount owed must be paid within a set time, usually thirty days. The charge for
credit is included in price of product for service. Most of Indian families use this type of

7
retail credit Consumer Finance for purchase of milk, newspapers, food grains, monthly
rent payment to servant, washerman, etc.

b) Revolving Consumer Finance:

It helps customer to continue purchases and pay whole or a part of the balance owed each
month. It has certain advantages and disadvantages. First, it enables purchase of a lar ge
rupee volume due to extended r epayment period. Second, this account is easy to use.
Once the account has been opened, the customer is free to buy without having credit
rechecked with each purchase.

The disadvantage of this type of Consumer Finance is that because of the ease and
convenience of purchase, customer may over purchase and thus he remains continually in
debt to the retailer. Second, the rate of interest ranges from 1.5 per cent to 2 per cent per
month.

c) Bank Credit Cards:

The first bank credit card of the current type was issued in 1951 by Franklin National
Bank of USA. The bank credit cards are convenient because of their wide acceptability
and their centralized billing system regardless of where purchase is made. There is only
one monthly bill. Master card, BOB card, StanChart, Citibank Card, is examples of bank
credit cards.

8
3.6 Major Areas of Consumer Finance
There are certain areas of Consumer Finance which exist in NBFC and Banks etc. These
areas are divided in to three major areas as follows:

MAJOR AREAS
In-House Vehicle
OF CONSUMER
consumer FINANCE F innance
Finance

Housing
Fiin ance

1. Housing Finance :-

The World Bank estimated the average ratio of mortgage credit supplied by formal sector
to housing investment was 28 per cent and in India it was 10 per cent. Typically in
developing economy the share of housing investment in GDP is about 2.5 per cent. It is
estimated that Rs.7, 000 crore had been already disbursed by the total formal sectors
finance for housing.

Major Sources of Housing Finance:

i. Government :

The Government reimburses loan to HUDCO (Housing and Urban Development

Corporation Limited). The HUDCO provides housing loans to development authority
and State Housing Finance. In turn, State HF extends loans to households.

9
 ii. Commercial Banks :

The commercial banks extend housing loans to HUDCO households.

iii. Life Insurance Corporation (LIC) :

The LIC had approved Rs.24, 825 crore cumulative loans to HUDCO, State Apex co-
operatives and households directly. It is the second largest housing financing institution
after HDFC.

iv. Capital Market :

The money raised through capital market is extended to HUDCO.

Housing Finance in the Indian Context:

The HDFC and LIC had market shares of 85 per cent. As per annual report 1996-97 of
the HDFC, it had a cumulative mortgage loan portfolio of over Rs.12, 232 crore. Loan
disbursement to individuals constitutes 67 per cent, to corporate bodies 32 per cent and
over 2400 towns and cities in India. The Apple Housing Finance lends up to Rs. 50 lakh.
At the high end, there is competition. Citibank s Housing Division-Shelter and Stan
chart Housing Finance concentrates on high net worth individuals.

2. Vehicle Finance :-

Vehicle Finance is ver y popular in India. Broadly ther e are two types of vehicle
financing facilities.

i. Car Finance :

The cur rent market size of 2.5 lakh cars is expected to explode in the coming years with
the entry arrival of new models such as Hundai, Indica, Uno etc. Well over 60 per cent
of the cars are expected to be purchased through vehicle finance companies in the near

10
future. The growth rate of car finance had been 15 per cent. Total car finance potential
was Rs. 1200 crore, out of which 70 per cent means rupees 700 crore were from
organized sector and 30 per cent means rupees 300 crore were an unorganized sector.
NBFC s have 80 per cent market share. The present market share of various companies
is shown in the following figure.

The disbursement of major car finance companies is shown in the following table:
Major Car Finance Companies (Rs. Crore )

Names 1993-94 1994-95

Apple Industries 101 250
Kotak Mahindra 98 250
20th Centur y Finance 109 200
SRF Finance 65 185
Tata Finance 29 65
Source: Capital Market March 13-26, 1995.

ii. Two-Wheeler Finance :

In case of two-wheeler finance, the Bajaj Auto Finance, and the Kinetic Finance are
major players. Both are original manufacturers of two wheelers. Bajaj Auto Ltd. has set
up Bajaj Auto Finance Ltd. It had disbursed Rs. 45 crore in 1991-92. Kinetic
Engineering has tied up with three finance companies. The tie up between Integrated
th
Finance Company and Kinetic Engineering is called Integrated Kinetic. 20 Century
Kinetic is the result of tie up between 20 th Century Finance and Kinetic Engineering.
Capital Trust and Kinetic Engineering have set up a Joint Venture called Kinetic Capital.

3. In-House Consumer Finance:

It was estimated that the size of market for consumer durable in India is between Rs.20,
000 to 25,000 crore and even a quarter of ties fridge, washing-machines and audio-
system i.e. major in-house consumer durable bought on credit means consumer financing

11
worth over Rs.7,500 crore. Though exact numbers are not available only Rs.200 to 250
crore worth of consumer durables were bought in 1997-98 on borrowed money.

3.7 Sources of Consumer Finance

The various sources of consumer finance available to people are discussed below:

Life
Insurance Consumer
Savings and Con s umeer Fiin ancee
Loan Fiinan cee Com mp anie
Association Co m paaniie s
S ource s s
L ifee
of Funds
Insurance Pawn
Credit Corporatio Br okeer
Union n

Commercial Credit
Banks Card
Instituti
o ns

1. Commercial Banks :
Commercial banks have a keen interest in providing, directly or indirectly, the finance for
consumer durables. Banks also lend large sums of money at „wholesale rates to
commercial or sales finance companies, Hire pur chase concerns and other such financial
intermediaries. Recently, banks have also started directly financing consumers through
personal loans, which are meant for purchasing consumer durable goods. Personal loans
are granted without a security. They are cheaper than hire purchase credit.
Banks a high-risk area, commercial banks ventured into the business of consumer credit
very late. It was in the year 1978, when the National City Bank of New York in the U. S.

12
 opened the first full-fledged consumer credit department. Now with the advent of
consumerism, banks have started participating in the consumer finance in a big way.

The commercial bank offers loans to qualified individuals on secured and unsecured
basis. Secured loans are based on security of collateral like cash surrender, gold,
jewellery, real estates etc.

The unsecured and single payment loans require only a customer s signature on a loan
paper. The loan papers have contents like repayment schedule, amount, due dates, etc. It
includes various types of loans like the regular loans, credit cards and check credit.

The important advantages of this source are as follows:

i. Mostly the rates of interest charged are usually lower compared to other Consumer
Finance schemes.
ii. It increases credit rating with a bank in case of favourable repayment without default.

The important disadvantages of this source are as follows:

i. It has rigid requirements to qualify for availing of consumer loans.

ii. It often avoids small-unsecured loans, as they are not perceived to be profitable to
handle by the commercial banks.
The consumer durable companies enter into strategic alliance with Nationalize Banks in
the public and private sector.

Example: 0% interest finance on all ONIDA color TVs being serviced by

countrywide finance, Bajaj auto finance, Trans Apple distribution and ICICI.

2. Consumer Finance Companies:

Consumer finance companies, also known as small loan companies , personal finance
companies or licensed lenders , are non-savings institutions whose prime assets

13
 constitute sale-finance receivables, personal cash loans to consumers, short and
intermediate-term business receivables, etc. These finance companies charge
substantially higher rates of interest than the market rates. Consumer approach them as a
last resort. Such companies run an equal risk of high collection charges too. It includes
leading companies like Countrywide, Whirlpool, Apple, MAS f inance, and Kotak
Mahindra.

The important advantages of this source are as follows:

i. One can obtain small loans from CFCs.
ii. It is easier to qualify for availing consumer loans for individuals.

The important disadvantages of this source are as follows:

i. The rates of interest charged are higher and they charge flat interest rates (16 to 20
per cent)
ii. The consumers are required to pay high processing fees.

Example: Onicra from Onida is a credit rating service for individuals in India.
Facility for personalized loans Anz Grindlays.

3. Credit Union :
A credit union is an association of people who agree to save their money together and in
turn provide loans to each other at relatively lower rates of interest. These are called
cooperative credit societies in India. The first credit union was started in Germany in the
year 1848. These are non-profit, deposit-taking and low-cost credit institutions. A
borrower must be a member of credit union. The credit unions are set up on the basis of
caste, employee, religion, nature of work etc., in India.

The important merits of credit unions are as follows:

i. The rate of interest is usually lower than other sources of consumer finance.

14
ii. They offer small loans based on a signatures only. They do not need any collateral,
and guarantors.

The key demerits of this source of consumer f inance are as follows :

i. Many customers may not like to reveal their financial needs to other colleagues.
ii. If customer is not or can not become a member of credit union he/ she cannot get loan
from it.

4. Credit Card Institutions :

Credit card institutions arrange for credit purchase of consumer articles through the
respective banks, which issue the credit cards. The credit card system enables a person to
buy goods and services on credit. The credit card scheme operates in the following way:

On presentation of the credit card by the buyer, the seller prepares three copies of the
sales voucher-the first for the seller, the second for the bank or credit card company and
the third for the buyer. The seller gives one copy to the buyer and the other is forwarded
to the bank for collection. The seller s bank forwards all such bills to the card issuing
bank or company. The bank credits the seller s account and debi ts the amount to the
customer s account. The buyer receives a monthly statement from the card issuing bank
or company and the outstanding amount is to be paid within a period of 20 to 45 days
without any additional charge. If payment is delayed, bank charges interest per year on
the amount outstanding.

5. Savings and Loan Association :

They mainly focus on home mortgage loan. It could offer loans only to those people who
have saving account with the association. The consumer loan is provided against the
account. It is also known as an account secured loan. The rate of interest charged is
usually lower compared to CFCs but it is higher in relation to those char ged by other
sources of consumer finance.

15
 6. Life Insurance Corporation :
Life insurance policyholders can avail a loan in the amount of cash surrender value plus
any accumulated dividend or interest from the insurance company. Such loans are called
policy loans because the life insurance policy serves as collateral.

The important advantages of this source are as follows:

i. It is simple and easier to obtain loan from Life Insurance Corporation,
ii. Their interest charge is based on outstanding loan balance.
iii. It offers flexible repayment schedule.

The important disadvantages of this source are as follows:

i. An amount outstanding is deducted from benefits paid to the policyholder in the event
of death of insured.
ii. A customer must be a Life Insurance Policyholder for getting loan.

7. Pawn Broker:
It is a last resort in a money crisis or when customer s credit does not permit borrowings
from any other sources. Customer gets loan by taking personal property to the Pawn
Brokers to serve as collateral. Loans usually amount to less than 50 per cent of
appreciated market value of collateral. This type of CF has more disadvantages than
advantages. Such consumer loans are very expensive because it carries interest rates
from 24 per cent to 100 per cent per annum. The loans also lack adequate protection to
consumer. The chief advantage is that it is quick.

16
3.8 Methods of Repayment of Consumer Finance

Dis abilityy
Insurance

Accce leeraatiion METHODS OF Gaar niishhm ent

Clause REPAYMENT

Add on Clause Balloon Balance Prepayment

The following methods are used for repayment in consumer finance.

1. Wage Assignment/ Garnishment :

According to this method a creditor can collect amount due by attaching a part of
debtor s income from employer. The legal process of attaching a debtor s wage is called
Garnishment.

2. Acceleration Clause:
This method provides that if more than one payment on the debt is missed or in some
cases if the payment is delayed for any reason the entire balance of the debt is due and
payable immediately.
3. Balloon Balance:
It refers to situation where a series of small monthly installment is followed by a series of
much larger monthly payment.

17
 4. Add on Clause :
This method holds that title remains with the seller until the account is paid. If customer
buys a house, the documents of house remain with the seller until the amount owed is
paid.

5. Prepayment :
According to this method the customer repays the loan amount before the mature date.
When customer does prepay, he r eceives a refund of portion of the interest charge
otherwise payable by him.

6. Credit Life/Disability Insurance :

It is a method of r epayment of debt to the lender if the borrower dies or becomes
disabled. The borrower pays the premium and it is included in loan.

3.9 Guidelines For Taking Consumer Finance

Example

Car Loan Bef ore going for consumer finance option a consumer should f ollow
following guidelines for taking up consumer finance here is an example of a car to
make it simple to understand. The guidelines are as follows:

1. THE RIGHT DEALER:

The first step is to identify the best suitable dealer, dealer with good quality products,
more options or varieties, better discounts and services. It was not often that customer has
dealers queuing up for his custom, as they are now; so make the most of it. Shop around
with a few dealers and play one against the other, but make sure one should be comparing
prices of models with similar features.

18
 2. THE RIGHT SCHEME:

Once customer has identified the best dealer, he will have to choose the financer who
gives him the best deal. To do this, he will have to apprise different lenders against the
various types of schemes on offer.

a) Margin money scheme:

The most common scheme going here, he makes down payment (typically 15per cent of
the cost of the car) and the lender lends him the rest.

With in this, however there are two variants: the advance EMI’ scheme and arrear
EMI’ scheme. In the advance scheme, the EMI is paid at the beginning of each month.
In the arrear scheme , it is paid at the end of each month .

For example, if a loan is disbursed in the last week of March the EMI for April is
paid in the first week of April under the advance scheme, and towards the end of
April under the arrears scheme.

At a given rate of interest, The EMI under advance scheme is generally lower than that
under the arrear scheme but there is no difference in the effective rate of interest
customer pay. That said, if he find that he is being quoted the same EMI for both arrear
scheme and advance payment, go for the arrear scheme.

b) Advance monthly installment scheme:

Some lenders claim to offer 100 per cent loan but ask for a few EMI s in advance. In
effect, therefore ,customer end up paying the margin money and additionally interest
thereon (because it counts as 100 per cent loan ). Bottom line is he will not be getting a
100 per cent loan, and he will be paying more as interest than he will be under margin
money scheme. Illustratively on a Rs200,000 loan at 15 per cent in terest over 5 years
, the effective interest works out to 19.17 per cent when you pay 5 installments in
advance.

19
 c) Security deposit scheme:

Here too, the financier offers customer a “100 per cent loan” but ask him to deposit a
proportion of the car value with him.

For example if deposit is Rs20000 for a loan of Rs100, 000, in eff ect, the 100 per
cent loan translates into 80 per cent loan.

Such schemes normally come with the enticement of a lower interest rate, but what he
gains by the way of interest, he loose by way of opportunity cost on the deposit he parks
with the lender. In a variant of these schemes, the financier may offer a monthly interest
on his deposit, but this rate is normally lower than the interest rate on his loan. Again if
he feels the deposit he parks may earn a better rate elsewhere, this scheme is not for
customer.

When customer is comparing two lenders, therefore remember to compare the EMIs only
in respect of similar schemes. In practice, however the intensity of competition in the
marketplace has effectively leveled the playing field and few lenders today offer the
advance monthly installment scheme or the security deposit scheme, which are
unattractive to most customers. That is no reason, however, for him to lower the guard.
Before he signs on the dotted line, make sure he knows that he is letting himself in for.

3. THE RIGHT FINANCER:

Most car dealers have tie-ups with different private banks, including foreign banks and
non-banking finance companies (NBFCs). The interest rate they offer and the terms of
lending vary within a small range, depending on the make and model of the car, the loan
tenure and the type of lending scheme. Opting for a loan from a lender attached to
customer s dealer may save his some legwork, but doesn t always protect his best
interests. That s because lender too have some room to flex interest rates in his favor, and
they may have to share this spread with his dealer who serves as a conduit for his custom.
However if customer do shop around, he is sure to be rewarded with better deals
.Approach lenders (or better, still their agents) directly and, as he did with the dealer,

20
drive a hard bargain. Some lenders may off er attractive interest rates, on condition that he
goes to one of the dealers that they have an arrangement within. Under this arrangement,
the lender gets an incentive from the dealer for directing the customer his way. However,
it means having to forgo the discounts he may have negotiated with the dealer of his
choice; the deal is not the one for customer. Ask for the same discount as he d negotiated
with his dealer, or threaten to walk away. In this Darwinian marketplace, faced with the
loss of a customer his lender can be persuaded to live with the dealer of his choice. This
way customer gets the twin benefits of the best discount you have negotiated and the best
financing scheme.

4. GET MORE MILEAGE:

Even though the most of the schemes that are currently on off er are virtually
indistinguishable, it is possible to extract some additional concession from one lender or
the other.

5. What is Zero PerCent Interest Loans? Is it Really 0 %?

In attempt to pump-prime a flagging car finance market, some financiers offer a “Zero
per cent loan”.

But, just how good is it?

For example, if customer opt for it, customer has to go for cash discounts offered by
manufacturers and dealers, which the financier pockets. In some cases, each
discount adds up to as much as Rs.30, 000.

Also, zero percent loans cover only 25 to 60 per cent of the car s ex-showroom price.
This means customer pay a bigger down payment from out of your savings, which if
customer would invested he d have earned interest. That opportunity cost needs to be
factored in while estimating the value of the zero percent loan. Additionally lenders levy
a “file charge” (much like a documentation fee) on such loans. What s more, the tenure in
respect of these loans never exceeds 18 months; for customer, this means certainly higher

21
EMIs. So don t fall for that catchy slogan. Evaluate gains (interest saved) against the
hidden cost (the discounts you forgo, the file charges and opportunity cost on the higher
down payment). Only then can you say if that zero percent loan is worth zeroing in on.

22
 CHAPTER
4
CONSUMER FINANCE AS A
SERVICE
4.1 Introduction

There are three key players in this business viz., lender, the finance company/bank and
the consumer. It works on the simple principle that the bank/finance company bor rows at
interest rate X, lends at interest Y, and earns Y-X profit.

4.2 Characteristics of Consumer Finance Service

Alike other services, Consumer Finance Services too consist of commonly accepted
characteristics outlined in brief as follows:

1. Intangibility:

Consumer Finance services can not be fully touched, patented and seen. Absolute
standardization of consumer financing services is not possible. There can be no
absolute inventories.

2. Inseparability:

Consumer Finance services cannot be separated from the person and firm providing
it.

3. Heterogeneity:

The human element is very much involved in providing and rendering Consumer
Finance service and it makes standardization a very difficult task to achieve.

4. Perishability:

Alike other services, Consumer Finance services cannot be stored because of its
perishable nature.

23
 n t lm ns a m n, w
prom o e, not p ssi l to a e T lev sion, F idge, b pay ng
co y ig t. l ss, use bra d a es such a
C ou n trywi de Wh irlp oo l, et c.
I se arabi ity Dire t s ll li ited s ale of T ain m r servic , ersonnel,
op erat io n , g eo gra ph ical ly wo rk fa st er.
l m i ed arket
H t r g n ii y i f c l t ss a d r i e u l t . a e u s ll cc i n n tt a nn n o
per onnel reduc role o h m an
e em ent.
Ow e s i Custo er ca n t ow . Send hi regular com any
re p o rt s, in vi te fo r m ee ti n gs
G ..
Pe ri sh ab il it y N o s to ri ng , p ro bl em of d ema nd Ad ve rt is e h ea v i ly du ri ng Di wa li ,
fl u c tu at io n. ma rr ia ge s e as on s etc . , o ffe r
spec al g fts, reduced int rst
ae .
4.4 Classification of Consumer Finance Services

A large number of classification schemes have been developed to provide strategic

insight in managing them.

1. The Nature of the Service:

Services are classified according to whether services are directed at people or

possession, at mind, physical possession or assets. Here Consumer Finance
services are directed at intangible assets with intangible actions.

2. Relationship between Service Organization and Customers:

Services can be classified whether the nature of the relationship is continuous or

intermittent and whether a customer needs to get into a membership relationship
with the service organization to access and utilize the service. In Consumer
Finance service, nature of delivery is continuous and type of relationship is of
membership type.

3. How the Service is Delivered:

In Consumer Finance services, customer goes to CFCs such as Countrywide,

GLFL, Apple, Whirlpool, etc. But in present fierce competition era such
companies go to customers to win them.

4. Service Inputs:

Services based on this criterion have been classified as primarily equipment based
or people based service. Consumer Finance services are primarily people based
service.

5. Contact between the Consumer and Service Provider:

On this basis, services can be classified as high contact or low contact services.
Consumer Finance service is low contact service.

25
 4.5 CONSUMER SERVICE AVAILABLE FROM CONSUMER FINANCE:

Both the organized and unorganized sector has together sought to address the problem. In
the organized consumer finance sector, mainly Citibank did the pioneering work when it
launched city home “shelters” a one-stop shop for buying a home, Citimobile-a package
to finance cars. It also launches a number of other schemes to finance white goods and
two-wheelers. American Express followed, but had to go in reverse gear because the
problem of bad debts. In the unorganized consumer finance was the indigenous
moneylenders overcharging the consumers fully aware of the lack of consumer interest in
seeking redressal. However, the organized sector offers finance at competitive rates
promising to revolutionize the business and make finance option available to a wide cross
section of people on a wide assortment of products. Consumer finance saw a new face lift
through forming joint ventures and offer consumer finance for even products that
couldn t be retrieved and sold in case of default of payment for example SOTC a tours
and travels company offers package loans for consumer to Europe, US, UK and
Australia . Now customers can avail loans for their studies, marriages, Anniversaries and
for buying jewelry, or any personal loans and credit card facility. Most of the personal
finances are financed by HDFC Bank and foreign Banks and for credit cards Citibank and
standard Chartered are leaders. It even eliminated excessive documentation, need for
guarantor, increased processing time and had customer friendly approach. Now consumer
is the king even he need not to go to banking institution he can process all the
documentation through Internet. This enabled consumer finance easy access to middle
class consumer.

4.6 CONSUMER FINANCE AND CREDIT CARDS:-

The emergence of multinationals in the India and liberalization initiative adopted towards
their entr y, and investments in the country have resulted in a spontaneous growth of the
Consumer Finance industry. With the immediate delivery of consumer products,
Consumer Finance has magic formula. Consumer Finance includes arrangements, hire
purchase schemes and chit fund scheme among others, where money is provided in

26
advance and is collected back in installments. The profit of the financier is the
percentage of interest they char ge.

There are markets that are larger in size and volume than India but few that can match its
growth and untapped potential. These two factors are likely to transform India into one
of the largest markets in the world. It can also prove very crucial even to the health of the
global economy in near future.

In all the financial instr uments, credit cards seem to be most popular worldwide. In
India, the Diner s club was responsible for initiating concept of credit card in the last
sixties known as Diner s card. It was more felt to be luxury than necessity in 1960s. In
1998 approximately about 3 million consumers using credit card popularly known as the
plastic money. They use these cards to cater almost all of their requirement form buying
of home appliances to vehicles. Because of 2.8 million credit card holders in India, it is
an effective tool to exploit vast untapped market in the hands of consumer financiers. It
is likely that in the next millennium, these credit cards may well be replaced by other
plastic payment mechanisms like debit cards, stored-value card and chips.

At present, numbers of banks have entered into this segment of business. To illustrate,
from about 2.8 million credit card holders in India, Citi bank has 8.5 Lakh members
with 33 per cent market share and accounts for 62 per cent of the Indian aggregate
card spread. Stanchart, BOB are other major players in the field. It is expected that this
figure may touch double digit by the year 2000 if the market is penetrated effectively or
even otherwise it is likely to be around 7 million, although the penetration level in other
countries is around 60 per cent. The rate in India stands at only 20 per cent. In India
Citibank are becoming familiar names which are the franchisers such as visa card and
master card that really process plastic money transactions. The master card in India has
22 issuer s banks as franchises. The visa card has 21 issure s banks has franchises. Both
of them have about 90,000 outlets accepting the cards. In the matter of card spr ead,
master card leads visa by Rs. 1,435 to Rs. 950 crore in the Indian mar ket. Globally,
master card spends was Rs. 17,50,000 crore in 1996.

27
The emerging trend indicates entry of “Debit cards” which are also gaining foothold in
India s Consumer Finance market. The debit card functions like a plastic chequebook
that draws money from an individual s account like any Automated Teller Machine
(ATM) cards. The debit cards too assume significance in view of the immense potential
it holds for consumer financing. These cards have been successful in Asia and players
like master card and visa card have recently conducted feasibility studies on it. The
important point in the debit card is that each card accepting retailer must have a point-of-
sale (POS) terminal. The POS machine reads the card s magnetic strip, hooks on to a
network to check if the card is valid, offers a way to identify the card holder as the right
person (a secret PIN number can be fed), captur es details of the transaction and conveys
it across to a centralized databank. It also delivers a printout on which the retailer can
obtain a signature to cross-check the identity.

The consumers in India are spending more on credit cards and using the revolving
facilities offered. It is believed that the credit card business is likely to grow further and
if this happens, Consumer Finance activities will also pick up and grow. Besides, as the
standards of living of middle-class Indians improve and incomes rise, so will be the
demand for consumer durables and Consumer Finance activities. It is being positively
supported with growth in double income households; a thousand-buck monthly
installment may not remain any longer a very big deal. As the „buy-now-pay-later habit
catches on, riding piggyback on the consumer durables could be a bonanza also for the
CFCs in the new millennium.

28
 CHAPTER
5
MARKET SIZE OF CONSUMER
FINANCE
The size of consumer finance market is estimated at Rs.50, 000 crore (including a credit
card spend of Rs10, 000 crore) and this is growing at a rapid clip of 25 per cent. It is also
a period when, for the first time, many Banks left their earlier preoccupations with
funding industrial projects and working capital, and took the conscious decision to fund
consumer demands and finance. Yet consumer penetration in India is just 2 per cent of
GDP against the 20 per cent reported in Southeast Asia. In the US, on the other hand, 40
per cent of the total banking credit is given to the household sector.

5.1 MARKET SCENARIO-MAJOR PLAYERS IN THE CONSUMER FINANCE

SECTOR:

P rivatte B ankks

NB FC C, MAJOR Foor eign

Fiinan cial Banks
PLAYERS
Institutions

Public Sector
Secto r Bank

In the public sector, the state bank of India (SBI) is making move to keep private sector
lenders from appropriating the entire consumer finance pie. Its brand “Big Buy” aims to
finance both small and big things, from kitchen appliances from cars. Indian Banks off er

29
loan at 10-16 per cent and allow a repayment period of 36 to 60 EMI , for housing
finance repayment period is even more.

The liberalization wave in the early 90s saw the emergence of a new mainstream
business literature through the evaluation of NBFC (Non banking finance companies)
these companies enable hire purchase scheme for consumer durables, though actually no
hiring is involved it is just plain consumer finance. Some top players here are ICICI,
HDFC, Citibank, Bajaj consumer finance, Kotak Mahindra, Bank of Baroda, etc.
There are loads of offers available in market with different interest rates ,rates which are
less attract consumers but still consumer go for higher rates charged by private banks
because of good service and less complexity. There are two kinds of rates, which
financial institute and banks charged:

1. Fixed Rate

2. Floating Rate

Fixed or Floating?

A decision on whether one should go in for fixed-rate or a floating rate loan now is
functional of two factors:

Customer s perception of where interest rates in the economy are headed, and customer s
capacity to ride the interest rate charges. A floating-rate loan lets customer can take
advantage of further falls in interest rates, but customer can stand to loose if interest rate
rises again. In other words, floating rates make sense only when the interest rates are high
and expected to fall. On the other hand, a fixed-interest loan immunizes customer to
interest rates jumps. If however, interest rate falls, customer can foreclose his loan and
refinance it on a lower rate-either with other lender or increasingly, with the same one.
Typically, fixed-rate loans come at marginal higher interest rate than floating rate loans:
that is the price customer pay for not wanting to bear the interest rate risk.

30
5.2 INDIA’S CONSUMER MARKETS:

Identifying a plausible market size f or product s

This report is intended to assist consumer product companies in identifying a plausible

market size for their product/s in India. The table below should be viewed in
conjunction with the text that follows:

India's consuming class

Table I
Table II
Estimated households by
Structure of the Indian consumer market (1995-96)
annual income
Annual Number of households
Annual income No. of income (in million)
(in Rupees) at households (in Rupees) Classification
1994-95 prices (in million) at 1994-95 Urban Rural Total
prices
<25,000 80.7 <16,000 Destitute 5.3 27.7 33.0

25,001-50,000 50.4 16,001-

22,000 Aspirants 7.1 36.9 44.0

50,001-77,000 19.7 22,001-

45,000 Climbers 16.8 37.3 54.1

77,001-106,000 8.2 45,001-

215,000 Consumers 16.6 15.9 32.5
>106,000 5.8 >215,000 The rich 0.8 0.4 1.2
Total no. of households:
164.9 million Total no. of households 46.6 118.2 164.8

a) Data on income distribution of households is insufficient in determining market

size for different consumer products in India. This is because of the lack of
homogeneity of the consuming class and the varying prices of a single product in
different parts of India. For example, vegetables generally cost more in
Mumbai than in Calcutta, hence vegetable-purchasing power for identical
income groups would be different in the two places even though they are the

31
 two biggest cities in India with comparable populations. In other words,
purchasing power is location-specific, not income specific. Consumption habits of
households are therefore better determinants of consumer market size than income
distribution. Of course, other factors are also to be considered and they are
detailed below.
b) While determining market size for a consumer product, the structure of the
consuming class as seen in Table II above, can be both revealing as well as
misleading depending on the kind of product. For example, any specific
consuming class would be fit to be a market for consumer products like tea
or soap, but a product such as vacuum cleaners would f ind market largely
only in the "consumers" and "rich" segments of the market as defined in
Table II above. Furthermore, even this may not be correct, because a taste for a
vacuum cleaner is not necessarily a function of purchasing power but of culture
and/or taste as well.
c) Identifying a plausible market size for a consumer product is therefore a
hazardous task in a heterogeneous countr y like India. Yet, the marketer needs
some data to come as close to the real picture as possible. For this purpose, it can
be cautiously assumed that purchasing power is proportional to income despite
variables such as location, taste etc. Companies are therefore advised to plan their
consumer product marketing strategies on an area-by-area basis, rather than on an
all-India basis.
d) Income data is insufficient. Therefore, it must be supplemented by product-
specific information regarding its existing stock in the marketplace (in the case of
consumer durables) and existing rate of pur chases.
e) It is also advisable to further refine the plausible market size by taking into
account details based on social, cultural and demogr aphic f actors.
f) Marketing a super-premium product such as a Rolex watch is relatively easy. Just
go for the income class above Rs. 106,000 per annum (in 1995-96) as per Table I
above. This class, Table I shows, comprises 5.8 million households. But the
problem lies in the fact that the 5.8 million households are spread all over India.

32
g) The prime market for consumer products in India is aware of the cost-benefit, or
value for money, aspect. Their concept of value incorporates socio-cultural
benefits in addition to product utility. For example, many households in the
"consumers" class and the "rich" class (as defined Table II) may have two
television sets, but both the sets may not be top-of-the-line. Thus, while they may
be demand for an additional TV set in many households in the two mentioned
classes, it must not be mistaken as demand for the higher priced TV models. The
prime consumer market in India therefore is not a market for absolute premium
products, but for something between the "high end popular brands" to the
"premium brands."
h) The class described in the previous paragraph is actually the "consumers" class
defined in Table II. This class comprises 33.5 million households as at 1995-96
and it owned and 'consumed' most of the expensive consumer products such as
refrigerators and washing machines as well as premium expendables. At 1994-95
prices, their annual household incomes ranged between Rs. 45,000 and Rs.
215,000 (to calculate the latest income statistics, use an annual inflator of 5 per
cent). In addition to this class, the "climbers" and "aspirant" classes (def ined in
the Table II) totaling 23.9 million households in urban India, also have the socio-
cultural traits of the "consumers" class and, with time, will join the consumers
class. Medium-to-long-term marketing strategy must therefore aim at the aspirants
and the climbers as well. This is based on the safe assumption that, except for the
destitute class as defined in Table II, the other classes are on the way to the next
higher class. For companies with long-term marketing plans in India, the
"consumers" (urban + rural), "climbers" (urban only) and "aspirants" (urban only)
classes can be clubbed together to give a market size of around 57 million
households which can be said to be the "prime segment" of the Indian consumer
market. This becomes even more true as consumer financing and the credit card
culture picks up. Fine-tuning between the classes is of course important, as
explained in the next paragraph.
i) Suppose washing machines are being marketed. Go for two broad types: fully
automatic and semi-automatic. Tar get the fully automatic machines at the

33
 "consumers" class and the semi-automatic at the "aspirant" class; the "climbers"
class will then overlap the market for both the types of washing machines.

The marketing strategist has to live with it because that is how the Indian consumer
market is in reality. There is hardly a charact eristic that applies across the market.
Hence, the term "Indian consumer market" is a misnomer: it would be more
accurate to describe it as a collection of different consumer markets.

34
 CHAPTER
6
CONSUMER FINANCE IN
INDIA
The consumer product market in India has under gone a sea change from what it was in
1980s to its present form. While liberalization has significantly contributed to this
change, the influence of factors like going awareness among consumers, rising disposable
incomes, huge ad spend by big companies and availability of a variety of goods, etc. can
not be downplayed. Of late, there has been a sharp rise in the consumption behavior
among the urban populace, especially among the upwardly mobile middle-income group.
This growth of demand for consumer durables gives a great opportunity to financial
institutions to promote their consumer finance schemes. Though the late 80s and early
90s witnessed the rise in the purchase of goods through financial schemes, over a period
of time growth declined for most of the goods. In the rural area the purchase of goods
through finance is more or less restricted to motor vehicles? The reason for the falling
penetration of consumer finance could be either the negligence of financing companies in
promoting their schemes or the lack of awareness among the consumers about the
availability of finance for various goods. Actually we feel that there is a lot of money
involved in consumer finance industry and the players should focus on rigorously
marketing their schemes and developing new product specific schemes. The first phase of
evaluation of consumer market in India the 80s and most of the 90s – was characterized
by some structural changes from the consumer s angle. With greater availability of
consumer products increasing number of players and hence their competition for a share
of the market, the consumer had a wider choice. This was accompanied by substantial
rise in media and advertising as well as household incomes. Increased product
availability and incomes led to tapping of the latent demand for the consumer goods on
the one hand. On the other hand, higher level of media reach and advertising enable the
creation of consumer awareness and aspirations. In the process, a whole lot of people
with aspiration to consume emerged. Consumer finance came up noticeably for housing
and purchases of manufactured consumer products that are relatively high priced. The
latent demand came from two categories of consumers – those with capacity to consume

35
and other aspir ants not in a position to do so on their own. From whatever source it might
be, an option of financing was open to both types. This piece focuses on the potential
mass market for goods and consumer finance therein. Consider the ownership of high
priced consumer durable products from mere 11.8 million in 1985-86; it grew almost six
fold by 1995-96, although it is just a tenth of the stock of non-white goods. Equivalently,
per household stock of white goods grew to 0.4 assets from 0.1 during this period. About
72 percent of purchases of white goods ended up in urban households in 1996-97. This
proportion was even higher in the earlier years. Thus, major chunks of these goods are in
the possession of urban household. That amounts to urban stock penetration of white
goods taken together going up from 35 percent in 1985-86 to 135 percent in 1995-96.
During the „90s, the financial institutions also made an impact on the purchase behavior
of the consumers. This period witness the high aspirations to consume along with faster
growth in incomes. Whether public or private, financial institutions have a larger role to
play in the future market growth. Besides expending the ground coverage, their effective
utility in terms of actual purchases through them by consumers has a much greater scope
than what they have been realizing. So-called plastic currency or credit card is playing
vital role in consumer finance the banking institutions, the manufacturers, and marketers
have sound network spread across countr y. New technology will pay more important role
in future in the Indian consumer market.

6.1 A BRIEF REVIEW OF CONSUMER FINANCING COMPANIES IN INDIA:

Consumer financing is an ongoing and rapidly growing marketing phenomenon in India.
To be brief, organized consumer financing activities emer ged in India with a pioneering
efforts put in around 1980s by Citibank which launched a package known as Citi mobile
for financing cars. Afterwards, the Citibank has also offered number of such other
schemes for vehicles and in-house finance to facilitate quick buying of white goods.
These efforts were responded by even American express but it did not picked up
momentum due to their own financial and bad debts problems.

36
In case of the public sector, the State Bank of India has initiated move to keep private
sector lender from appropriating the entire Consumer Finance for almost ever ything i.e.
home, and cars to kitchen appliances. Although, the private sector till date occupies a
sizeable market share of consumer financing in India. The recent most vibrant, open,
global, liberalized and market-oriented new economic policy 1991 has opened floodgates
for them. Those companies before that in an old parlance were in business of „hire-
purchase have ventured into area of consumer finance, which even includes many non-
banking finance companies (NBFCs). The major players in the area of Consumer
th
Finance consist of 20 century finance, classical finance services and SRF finance. The
biggest merit of the area of Consumer Finance is that there are no entr y barriers in it.
One of the major developments that took place in 1995 with regard to execution of a joint
venture between Countrywide Financial Services, and Housing Development Finance
Corporation (HDFC). Their entry into the IHCF market was revolutionary in order to
increase availability and accessibility of Consumer Finance facilities to wide range of
variety of cross sections of consumers in the country. In 1998-99, Kotak Mahindra
Finance Ltd. Has innovatively introduced a cross between credit card and a loan. It is
aimed to make loan taking on a consumer durable a convenient experience. Its
application is designed to create win-win strategy alike barter for all three parties
involved in deal viz., consumer, company selling product and Kotak itself.

K – VALUE FROM KMFL (Kotak Mahindra Finance Ltd.)

The K-value scheme was introduced in November 1997. K-value is a customer durable
finance system and members are provided with a membership card with the help of which
they can make the purchases of durable as per the requirement. The K-value is different
than credit card where the usual repayment time is about 45 months. In K-value scheme
a member can repay for the purchase made in 12, 18, 24 or 30 months according to his
choice and convenience. The K-value scheme, which is like hire-pur chase scheme also,
provides the benefit of a plastic card. The only condition to this scheme is that the
purchase should not be less than Rs.10,000. It provides psychological confidence of
buying along with money power and also facilitates quick buying without any delays.

37
The members may also get benefits of competitive prices. Though it looks like credit
card but in a normal case the upper limit of a plastic card is around Rs. 15,000 where as
that of K-value would run into lakh depending upon the user s choice. To be brief, the
philosophy of K-value rests on that “The customer is the King.”

6.2 EXAMPLES OF CONSUMER FINANCE COMPANY:

i. CONSUMER FINANCE IN CITIGROUP:

Serving more than 8 million customers through more than 2,400 offices in the United
States and Canada, CitiFinancial is the leading community-based consumer lender in
North America. As an industry leader and member of Citigroup, CitiFinancial strives to
set an example of excellence in the consumer finance industry. This is evident in the
way we do business in 48 states and the Commonwealth of Puerto Rico in the United
States and in 11 provinces and territories in Canada.

Commitment of CITIGROUP:
Since our founding in the United States in 1912, CitiFinancial has learned that there is no
one-size-fits-all approach to helping people manage their money and their debt.
CitiFinancial loans offer consumers a chance to improve their quality of life, while also
improvi0ng their credit. Once a solid credit history is established, the door to opportunity
Opens much wider.

For some customers, a personal loan from CitiFinancial may meet their needs. For others,
using some of the equity in their homes as collateral for loans for debt consolidation,
college tuition or other important needs may be the best option. Regardless of the
product, our employees are expected to follow the CitiFinancial philosophy, "Do the right
thing, every time, all the time." That means working with our customers individually to
find personalized financial solutions that meet their specific needs.

38
CitiFinancial s more than 15,000 employees play an active role in the communities where
they live and work. Volunteerism and financial support to community-based non-profits
through Citigroup Foundation grants are part of the CitiFinancial way of life.

Financial education is a natural extension of what CitiFinancial and its parent company,
Citigroup, do every day. Bank support financial education because it believes access to
investment products, credit and capital can raise the quality of life for individuals and
families and strengthen communities around the world. But capital must be used
responsibly and wisely, and good financial information can help people make the most of
their money.

Each year, CitiFinancial educates thousands of consumers about the types of financing
available to them, both through one-on-one discussions in our branches and through work
with consumer advocacy organizations. In addition, when making loans or offering
optional insurance or other products, it makes sure that consumers understand their loan
agreements by clearly and prominently displaying the terms of the products in
CitiFinancial loan documents and marketing literature, through signage in the branch, and
in discussion with applicants and customers.

ii. GE CONSUMER FINANCE

GE Consumer Finance Is a Leader in Providing Credit Services to Retailers and

Consumers
GE Consumer Finance offers clients a full range of operational, financial and analytic
support, and develops customized marketing programs designed to increase sales and
customer loyalty.

This philosophy of partnership has helped it grow to over $18 billion in total assets and to
serve more than 70 million cardholders.

GE Consumer Finance is a leader in providing credit services to retailers and consumers.

Formed in 1932 as a provider of consumer financing for GE Appliances, GE Consumer

39
Finance provides private label credit cards, commercial programs and card-related
financial services for hundreds of retailers and manufacturers across North America.

GE Consumer Finance also issues and services corporate cards for commercial
customers, including purchasing, travel and fleet vehicle cards.

GE money India:
A global leader in consumer finances. More than 118 million satisfied customers. A
remarkable presence in more than 50 countries. Total assets worth more than US $ 105
Billion.
In India, GE Money is a leading provider of financial services to suit varying needs. With
joint ventures and customized products, GE Money adds value
to its partners as well as individual customers. GE Money offers:
1. Innovative products to meet individual needs
2. Customized products for individual consumers and retailers
3. Easy access through 4500 outlets , Vast network across 60 locations in India
4. Product offerings include Car Finance, Home Loans, Personal Loans, etc.
5. Joint ventures with Maruti and State Bank of India

GE Money Advantage:
Amidst a plethora of existing financial services, products from GE Money stand apart.
This is because of the product featur es and our customer-
Friendly processes.
a) Reduced approval time
b) Flexible documentation policies
GE Money ensures that customers get an easy, simple and speedy experience.

40
PRODUCTS OF GE MONEY:

PERSONAL LOAN:

. GE Money Personal Loan offers customers easy access to money with minimum
documentation, and offers customers maximum benefits:
a) Customized loan options for both salaried and self -employed individuals
b) Higher loan amounts
c) Competitive rates
d) Easy documentation options
e) Insurance protection on your loan
f) Quick processing
g) Documentation is an easy process with GE Money.

HOME LOAN:
GE Money Housing Finance offers you complete solutions for all your housing related
needs. Avail of unmatched advantages.
a) Home Loans upto Rs. 2 Crores
b) Attractive interest rates
c) Up to 85% of property value as loan
d) Loans for ready to move-in residential properties
e) Longer tenor of up to 20 years
f) Attractive offers on Loan Transfer from other banks
g) Insurance Cover on your Home Loan
h) Income Tax benefits
i) Simple documentation and doorstep service

LOAN AGAINST PROPERTY:

Unlock the treasure in customer s home with GE Money Loan against Property. With a
hassle-free processes and minimal documentation, we extend maximum benefits to you.
a) Get a loan against self-occupied, rented and vacant residential property

41
 b) Transfer your existing loan to GE Money at attractive interest rates
c) Quick Loan approval
d) Minimum formalities and paperwork
e) Longer repayment periods
f) Insurance Cover on your loan
g) Documentation is an easy process with GE Money.
h) Charges applicable to home equity customers have changed .

CONSUMER DURABLE LOAN:

GE Money Consumer Durables Loans is your ticket to your favourite household
products. GE Money Quick & Easy loans for consumer durables:
a) Air-conditioners
b) Television
c) Refrigerator
d) Washing Machine
e) Invertors
f) Mobile Phones
g) Personal Computers
h) Notebooks
i) Microwaves
j) And a lot more

GE money tie-ups with major appliances and electronics manufacturers allow to offer
customer the best finance schemes. GE Money offers attractive benefits on all consumer
durable loans:
a) Easy EMIs to suit your pocket
b) Special 0% schemes on select brands and models

42
USED CAR LOANS:

GE Money actually believes in fulfilling all customer s wishes. Next time customer want
to buy a used car, rest assured that GE Money is there to say Yes.
a) For GE Money finance on used cars
b) Attractive repayment period of up to 72 months
c) Transparent procedures
d) LCRS up to 90%
e) Competitive rates
f) Speedy approval and disbursement

TWO-WHEELER LOAN:
Apply for a GE Money Two-wheeler Loan today and ride away to happiness. GE Money
offers attractive finance options on bikes and scooters of customers choice:
a) Best-in-class rate of interest
b) Longer repayment periods ranging 12 to 48 months
c) Customized EMI to suit your pocket
d) Electronic Clearing System (ECS) facility in select cities
e) Faster approval
f) Minimal documentation

6.3 COMPARISION ON SOME IMPORTANT

PARAMETERS IN CONSUMER FINANCE:

Max. Max. Interest Process-

Company Eligibility Products
Amount Tenure Rate ing Fee

Min. 0% - 4/12
Countrywide
Income advance
- Classic s.1 lakh 36 months 2% Consumer
Rs. 3000- EMIs durables
Scheme
3500 per 16%- 1/12

43
 month advance
EMIs

0% - 4/12
Min.
advance Consumer
Countrywide Income
EMIs durables,
- Express Rs. 3000- Rs. 90,000 36 months 2%
16%- 1/12 PCs, two
Channel 3500 per
advance wheelers
month
EMIs

0% - 4/12
Min.
advance Consumer
Countrywide Income
EMIs durables,
- Instant Rs.3000- Rs. 25,000 36 months 2%
16%- 1/12 PCs, two
ATM Loans 3500 per
advance wheelers
month
EMIs

TVs,
washing
machines,
ref rigerators,
Existing air-
Based on Based on
home conditioners,
HDFC repayment repayment 13% 1%
loan PCs,
capacity capacity
customers branded
furniture,
new two-
wheelers and
new cars

Min. 0% - 4/12 All consumer

The Income advance durables
Rs. 1 lakh 36 months 2%
Associates Rs.50,000 EMIs valued over
per year 9.9% - Rs. 7500

44
 3/12
advance
EMIs
14%- 1/12
advance
EMIs

11%-
Min. 11.5%
Income depending
ICICI Rs. Rs.300,000 36 months on All consumer
durables
120,000 amount
per year and
tenure

Cons.
Rs. 40,000 Durable,
A/c
EMI not Hshld appl,
holder,
Allahabad more than vehicles,
Min 36 months 16.5% 1%, Min.
Bank 50% of Rs. 500 PCs,
Income
monthly software,
Rs. 7500
salary book,
teaching aids

A/c
holder,
Min. All consumer
Corporation
Income Rs. 50,000 36 months 16.25% Rs. 250 durables,
Bank
Rs. two wheelers
60,000
per year

Bank of A/c Rs. 1 lakh 3% or Rs. All consumer

Baroda holder for 5x 60 months 14.5% (3% over 2000 durables

45
 at least 6 monthly PLR) whichever
months income is lower

Anybody
with a 14% (2% All consumer
Central
known Rs. 2 lakh 36-60 over 1% durables,
Bank months
source of PLR) two wheelers
income

A/c
Air
holders, 6% - 4/12
conditioners
HDFC Bank Min. Rs. 1 lakh 36 months advance 2%
and Personal
Income EMIs
computers
Rs. 7,500

Diff erent
schemes
for
A/c
different
holders,
models -
HDFC Bank Min. Rs. 1 lakh 24 months 2% Two
2.99% to wheelers
Income
13.5%
Rs. 4,500
with
advance
EMIs

6.4 CONSUMER FINANCE SCAMS:

Federal Trade Commission Protecting America's Consumers

Susan Grant
National Fraud Information Center
National Consumers League
December 1996

46
The Scope of the Problem:

Consumers who face financial troubles, such as heavy debt, poor credit, or the need for
substantial help for educational or personal finances, usually can least absorb the
economic injur y caused by fraud. Fr aud promoters know that these consumers are willing
to pay small amounts of money to process loans, arrange financing, or help locate sources
of credit that promise to cure their financial woes. Recent FTC law enforcement efforts
demonstrate that fraud promoters who promise financial services or assistance for a
several-hundred-dollar fee generally do not deliver. Instead, they take millions of dollars
from consumers without providing any services at all.

Advance-Fee Loan Scams:

Consumers often respond to ads in the classified section of newspapers or magazines that
promise loans or credit cards regardless of an applicant's financial situation or credit
history. A fraudulent telemarketer typically tells them that they must pay a fee in advance
--ranging from $25 to several hundred dollars--for the loan or the credit card. Consumers
are reassured that they have nothing to lose because they will get a refund if they are
turned down. However, consumers generally receive nothing, even after paying the fee.
Sometimes, they are referred to other companies that require additional payments. These
"turn down rooms" do not make good on their promises to deliver refunds, either.

Credit Repair Scams:

Credit repair is an especially pernicious fraud that preys on consumers who have run into
financial trouble and as a result, have bad credit reports. Thousands of firms across the
country claim that they can restore consumers' creditworthiness for a fee. Most credit
repair firms claim that if information on a credit report is not 100 percent accurate, they
can challenge it and have it permanently removed from a consumer's credit report.

The fact is that accurate negative information stays on consumer credit reports for seven
years--10 years in the case of bankruptcies. Credit repair firms can challenge the accuracy

47
of information on consumers' credit reports, but consumers can do the same thing for
themselves for free.

Some credit repair firms use a technique known as file segregation . These firms advise
consumers to apply for an employer information number (EIN) from the IRS, which has
the same number of digits as a social security number, and use it to build fresh credit.
What they do not tell consumers is that this is a felony.

To combat these problems, Congress has given law enforcement and the public two key
tools to address credit repair fraud. In addition to the TSR, which became effective
December 31, 1995, Congress also enacted the Credit Repair Organizations Act
(CROA)(20) in September 1996 to ensure that the public has information necessary to
make informed decisions about using credit repair firms--including those that do not
principally telemarket their services-- and to give the FTC, the states, and individual
consumers legal remedies to combat credit repair fraud. The CROA takes effect March
30, 1997.

FTC Actions:

Consumer finance scams keep their fees low enough so that even consumer s facing heavy
financial burdens can afford them. Scam artists can generate enormous profits by mass
marketing their services to million of these consumers. Indeed, the FTC sued one
fraudulent scholarship service in 1996 that sent more than a million allegedly deceptive
mailers in six months to parents of college-age children. Given the aggressive marketing
techniques used by consumer finance scam artists nationwide, more coordinated law
enforcement is necessary.

Project Loanshark:

The FTC targeted companies that promised loans and credit cards to anyone in return for
a fee paid in advance. In June 1996, the FTC and 15 state Attorneys General initiated 13
lawsuits in federal district courts and state courts, naming 45 corporations and individuals
operating out of the U.S. and Canada.

48
Project Payback:

The FTC used coordinated federal-state efforts against telemarketers who promoted
credit repair scams. In April 1996, the FTC, nine state Attorneys General, and the District
of Columbia government brought 17 law enforcement actions against 13 credit repair
firms across the country. Many of the actions invoked provisions of the Telemarketing
Sales Rule that specifically addr ess cr edit repair.

Project $cholar$cam:

In August 1996, the FTC launched Project $cholar$cam, a massive consumer education
and law enforcement effort highlighting scams that target high school and college
students in search of money to finance their education. Since the start of Project
$cholar$cam, the FTC has filed lawsuits against seven scholarship services located in
Atlanta, New York, Ft. Lauderdale, Baltimore, and Seattle that targeted millions of high
school and college students across the country. The FTC estimates that these seven
companies brought in more than $15 million over the last five years from more than
100,000 consumers. Aside from putting a stop to the fraudulent practices of these
companies, Project $cholar$cam was responsible for a huge surge in public awareness
about this type of fraud. The FTC's action was covered in more than 100 newspapers in
40 states, as well as in national publications like the New York Times, Washington
Post, USA Today, Smart Money, and US News & World Report. The FTC also
produced creative consumer education materials that have been distributed to high
schools and colleges throughout the country, including bookmarks and posters targeted to
high school and college students and their parents, posters distributed to thousands of
college bookstores, and flyers for college financial aid offices and high school guidance
offices.

The FTC worked with many partners in the private sector to ensure that the "scholarship"
message got out to students and families. Members of the Interactive Services
Association's Project Open, a program to encourage safe and productive experiences for
all online and Internet users, launched a campaign with the FTC featuring alerts about
scholarship scams through their on-line members. The National Association of Student

49
Financial Aid Administrators, the College Board, and Sallie Mae were among the
organizations that publicized Project $cholar$cam and provided links to the Scam Alert
on the FTC's home page.

With fraud promoters targeting millions of consumers coping with financial burdens, a
multi-faceted anti-fraud approach is clearly necessary to make headway in shutting down
such fraud. New legislation, such as the Credit Repair Organizations Act, provides a
further basis for collaborative efforts in fighting consumer finance fraud.

6.5 CONSUMER CREDIT RISK:

1. CREDIT RISK:-

Faced by individuals:
Consumers may face credit risk in a direct form as depositors at banks or as
investors/lenders. They may also face credit risk when entering into standard commercial
transactions by providing a deposit to their counterparty, e.g. for a large purchase or a
real estate rental. Employees of any firm also depend on the firm's ability to pay wages,
and are exposed to the credit risk of their employer.

In some cases, governments recognize that an individual's capacity to evaluate credit risk
may be limited, and the risk may reduce economic efficiency; governments may enact
various legal measures or mechanisms with the intention of protecting consumers against
some of these risks. Bank deposits, notably, are insured in many countries (to some
maximum amount) for individuals, effectively limiting their credit risk to banks and
increasing their willingness to use the banking system.

Faced by lenders to consumers:

Most lenders employ their own models ([[Credit Scorecards]]) to rank potential and
existing customers according to risk, and then apply appropriate strategies. With products
such as unsecured personal loans or mortgages, lenders charge a higher price for higher

50
risk customers and vice versa. With revolving products such as credit cards and
overdrafts, risk is controlled through careful setting of credit limits. Some products also
.require security, most commonly in the form of property .

2. Consumer Credit Risk Management

Most companies involved in lending to consumers have departments dedicated to the
measurement, prediction and control of losses due to credit risk. This field is loosely
referred to consumer/r etail credit risk management; however the word ''management'' is
commonly dropped.

3. Credit Scorecards
A common method for predicting credit risk is through the credit scorecard. The
scorecard is a statistically based model for attributing a number (''score'') to a customer
(or an account) which indicates the predicted probability that the customer will exhibit a
certain behaviour. In calculating the score, a range of data sources may be used, including
data from an application form, from credit reference agencies or from products the
customer already holds with the lender.

The most widespread type of scorecard in use is the '''application scorecard''', which
lenders employ when a customer applies for a new cr edit product. The scorecard tries to
predict the probability that the customer, if given the product, would become "bad"
within a given timeframe, incurring losses for the lender. The exact definition of what
constitutes "bad" varies across different lenders, product types and target markets,
however examples may be ''"missing three payments within the next 18 months"'' or
''"default within the next 12 months"''. The score given to a customer is usually a three or
four digit integer, and in most cases is proportional to the natural log of the odds (or logit)
of the customer becoming "bad". In general a low score indicates a low quality (a high
chance of going "bad") and a high score indicates the opposite.

Other scorecard types may include '''behavioural scorecards''' - which tr y to predict the
probability of an ''existing'' account turning "bad"; '''propensity scorecards''' - which try to

51
predict the probability that a customer would accept another product if offered one; and
'''collections scorecards''' - which try to predict a customer s response to different
strategies for collecting owed money.

4. Credit Strategy:
Credit strategy is concerned with turning predictions of customer behaviour (as provided
by scorecards) into decisions.

To turn an application score into a Yes/No decision "cut-offs" are generally used. A cut-
off is a score at and above which customers have their application accepted and below
which applications are declined. The placement of the cut-off is closely linked to the
price [Annual percentage rate/ APR] that the lender is char ging for the product. The
higher the price charged, the greater the losses the lender can endure and still remain
profitable. Therefore, with a higher price the lender can accept customers with a higher
probability of going "bad" and can move the cut-off down. The opposite is true of a lower
price. Most lenders go further and charge low scoring customers a higher APR than high
scoring customers. This compensates for the added risk of taking on poorer quality
business without effecting the lender's place in the market with better quality borrowers.
In the UK, lenders must advertise a ''typical'' rate, which at least 66% of customers must
receive.

Application score is also used as a factor in deciding such things as an over draft or credit
card limit. Lenders are generally more happy to extend a larger limit to higher scoring
customers than to lower scoring customers, because they are more likely to pay
borrowings back.
Alongside scorecards lie ''policy rules'' which apply regulatory requirements (such as
making sure there is no lending to under 18s) and other lending policy (such as many
lenders will not lend to customers who have a [County court judgment/CCJ] registered
against them).
Credit Strategy is also concerned with the ongoing management of a customer's account,
especially with ''revolving'' credit products such as credit cards, overdrafts and flexible

52
loans, where the customer's balance can go up as well as down. Behavioural scorecards
are used (usually monthly) to provide an updated picture of the credit-quality of the
customer/account. As the customer's profile changes, the lender may choose to extend or
contract the customer's limits.

53
 CHAPTER
7
CONCLUSIO
N
Many players have and will come to play in the market, because there are no barriers to
entry, only holding of assets required, ability to source funds, capability to reach out to
the customers and ability to understand the credit risk. On the other hand today with the
NBFCs showing a poor management of assets and misuse of public deposits leading to
many a NBFCs failure has only resulted consumer to prefer indigenous lenders of loans.
Further many MNCs will also enter the scenario with growing liberalization of world
trade of service the Indian consumer desire to accumulate a high standard of living, as he
is also shedding of his “Shame Syndrome” in obtaining loans. Thereby the market may
see a boom in the unsecured loans being delivered door-to-door in future. Overall, one
can see that this market is characterized by quick loss of product differentiation due to
competitive offerings and it will only be great ideas, which will drive the successful.

54
 Bibilograph
y

www.google.com
www.nseimdia.com
www.bseindia.com
www.investopedia.com
www.gemoney.com
www.moneycontrol.com
Advanced Financial Management. By I M Pandey

55