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| Kathmandu, Tuesday May 07, 2002 Baishakh 24, 2059. |
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Consumer finance market :
Prospects and challenges
By CHANDRA THAPA
For decades, the Asian economy was primarily
based on high rate of savings and investments, with consumption being suppressed.
Household thrift has been a major cause for the recklessness in consumer spending, giving
birth to the mess of many Asian banks.
Ever since the financial crisis in 1997-98, the
vast throwing of the deposits by the banks to the conglomerates has turned out be sick,
giving rise to non performing assets. In China, of the total lending, four-fifth goes to
the state-owned enterprises and almost half of them are bad.
Economists are claiming that South Korea is
picking up with Japan in terms of growth and boom in business. What made them to put such
concrete claims? Among all the East Asian nations, South Korea is one of the fastest
growing consumer markets. After the economic collapse of 1997-98, the South Korean
government forced the biggest borrowers to restructure and cut their debt advising the
banks to lend elsewhere. This helped in the explosion of retail lending. Half of the
Korean’s bank and non-bank lending, which is around US 265 billion dollars, now
accounts to individuals and households. In 2001 the spendings through the payment cards
accounted around US 341 billion dollars and is still in its growth stage. Plastic money
(credit card) is becoming one of the key instruments of consumer finance. Rupert Keeley,
regional head of real Visa, says that East Asia is and will be in coming days, Visa’s
fastest growing market and the growth is not only confined to payment card expenses but
home mortgages, car loans, unsecured credits and other forms of consumer finance will also
be soaring at the same alarming pace. This shows that financial institutions are gradually
shifting their focus from financing big corporate houses to individual consumers whom they
are finding less risky and more profitable. Looking at the new spendthrifts, even the
Chinese government has encouraged banks to go after the consumer as a result of which
outstanding consumer loans in China rose twenty-fold between 1997 and 2000. All these
analyses reveal that consumer financing which was not given due importance earlier has now
become a tremendous prospect.
India has also been making promising growth
prospects due to the rise of middle class consumers and changing lifestyle. The credit
card market, one of the instruments of consumer financing, is growing at a pace of 25
percent and ICICI, now India’s second largest bank after its merging, is moving at an
even faster pace and is set to eat the biggest market share. Asian banks are also
targeting the young generation. One of the good examples is the trial for issuance of
Smart cards to the students by ICICI in collaboration with Infosys, India’s giant
software company, and Manipal Academy of Higher education, whereby the students can charge
everything on their cards without the need of any cash. Another service, which has been
launched by the same bank, enables the customers to top up their Airtel mobile card at
ICICI automated teller machines (ATMs). This shows that there is a rapid innovation going
on to tap this lucrative market.
Banks are now taking care of every financial
aspect of their clients and in many cases of other’s as well as a part of their cross
selling marketing strategy. The Indian Railway Catering and Tourism Corporation has
collaborated with ICICI to facilitate on-line payment for ticket booking which is due to
be launched very soon. Hence, it shows that retail banking with intense stress on handling
the financial needs of individual customers is heading towards a big boom.
Now let’s turn our attention to this market
and analyze the fact whether the expansion of this business is feasible in the future or
not. Whatever a bank does, the prime motive is to keep focusing on the bottom line figure,
creating value for shareholders and long term sustainability of their business. Hence,
computation of risk and seeking the viability of lending is the most essential part of
every credit policy.
Among all the demographics, young Asians are the
prime target market but selling to them is a formidable challenge because they are more
savvy than their purchasing power. In case of payment cards, the problems are the bad
payment infrastructures and limited card acceptance by vendors. China only has 40,000
merchants equipped to swipe a credit card. The biggest of all is the dearth of credit
information. In countries like America, Britain and Canada efficient credit information
bureaus are the key sources of intelligence for the banks where they can access
information regarding their customers. With the help of these institutions, the banks not
only find out whether a prospective borrower has already defaulted on a credit but can
also know the regularity at which the customer has discharged their liabilities.
Among the developing countries in Asia, only
Taiwan and South Korea have such bureaus, while Singapore is establishing one, and two of
China’s most developed cities Shanghai and Shenzhen have just initiated to set-up
theirs. Across the entire Asia most of the banks are still not in the "black or
white" area regarding the people who walk into their branches. This shows whatever
lending to the individuals are taking place are not based completely on perfect or
reliable information. Hong Kong leads the world in default rate in case of card debt as
they were unaware of the fact that how much people had borrowed and the same plight may be
encountered by other Asian banks if they do not make justifiable lendings. Another matter
of overriding concern is that Asian banks, as well as societies, are new to a consumer
driven culture, especially in the absence comprehensive and transparent legal system.
All the above-mentioned problems thrust immense
challenges into this lucrative sector, the sector that not only lures the banks but is
also an instrument for boosting the economy of a nation. Because consumer oriented
borrowing leads to major demand, which encourages spending, resulting in the growth of the
economy. It has been observed in many nations that when demand declines the tax refund and
the interest rate cut policies have triggered demand putting the economy back on to track.
It’s what the market is telling us and we have to heed to it with due care.
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