Sailing the small boat

The worry of public sector banks is understandable. Financial institutions, which were supposed to extend term loans to corporates have now entered short-term lending 8212; the domain of commercial banks. On top of this, the dividing line between institutions and banks are getting blurred with the former now allowed to take deposits as well. Even interest rates had come down by two percentage points recently, credit offtake has not picked up 8212; according to the Reserve Bank of India RBI, the decline in non-food bank credit between March 28 and June 20, 1997 was to the tune of Rs 4,064 crore.The banking system is flush with funds, but there is no genuine demand from the industry to avail credit even at reduced rate of interest. Banks cannot sit idle on their deposits as they have to pay interest to their resources. Government securities and priority sector lending have become the favourite avenues to deploy funds, but that is not enough to absorb the huge amount of money lying idle with the banking system.

There8217;s no wonder that banks have entered the consumer finance while seeking greener pastures. Some banks have even started negotiating with manufacturing companies to finance their products, especially consumer durables. Finance companies, which were active in the consumer finance, have slowed down their business thanks to the CRB Capital scam and slowdown in fund flow to finance companies. Many business groups like Bajaj Auto, Kinetic Engineering and Videocon had floated their finance companies to finance the offtake of vehicles and consumer durables.

Will banks elbow out finance companies? It may be recalled that some banks had tried consumer financing some years ago, but miserably failed to make any impact. Thereafter finance companies, which mushroomed in every corner of the country tried their hands. Many of the NBFCs burnt their fingers in consumer financing. The sudden rise in interest rates two years ago and the liquidity crunch created problems on this front as well. 8220;I don8217;t think banks can do anything significant in the short-term. You need credit monitoring system, screening of consumers and recovery of loans. Besides, the segment has not grown to such an extent for commercial banks to be active,8221; says G C Garg, managing director of Lloyds Finance.

However, banks seem to have other ideas. State Bank of India SBI 8212; the largest bank in the country 8212; has taken the lead in consumer financing. It has planned to open 100 branches exclusively for consumer financing by accepting deposits and advancing consumer loans through these retail outlets. 8220;We are planning to enter the personal finance business in a big way. One route to enter the consumer finance market is through the credit card subsidiary. Once we build up a number of card holders, we will enter the consumer finance by opening branches to cater to personal finance,8221; says M S Verma, chairman, State Bank of India SBI.

The entry of new private sector banks and foreign banks into the consumer finance business has been restricted by the less number of branches. While foreign banks find it difficult to get new branch licenses, some of the new private sector banks are shy to enter consumer finance business. 8220;We will not enter consumer finance market immediately as part of our corporate plan for the next three years,8221; says Ashish Sen, Chairman and Managing Director, Centurian Bank.

8220;Our worldwide strategy is to provide entire range of retail financial services. This has prompted our entry into retail business which is growing,8221; says G Suresh, senior manager auto finance, Standard Chartered Bank.

8220;Even if we have consumer finance business, this business is not our primary emphasis. Some banks have started the business because recovery possibility is good,8221; says Rajendra H Kulkarni, chief manager credit, Bank of Maharashtra. Since the consumer finance business will always be linked to the salaried people and the corporate sector, the risk will be spread over.

8220;Instead of giving a huge loan to a dubious corporate house and blocking the funds as non-performing asset for several years, consumer finance spread over several salaried individuals is more safe,8221; says another senior bank official.

Another advantage of consumer finance business is that the loans are given to employees of listed companies, select group of private limited companies and other reputed institutions. In the case of housing finance, for instance, lending institutions are getting a guarantee from the employees regarding the repayment of loan amounts. The financing agencies can also tie up with the producers of white goods and other products which require financing.

Will the latest gamble by commercial banks pay off? It is early to say. But in the current situation this appears to be the best step to take.