Companies & Sectors
Retail lending shows signs of recovery with in-house sourcing and collections

Indian retail lending is picking up momentum again after past mistakes. According to IDFC, the segment is likely to grow at a 29% CAGR over FY10-FY12 to a whopping Rs4.2 lakh crore

India's retail loan segment is making a comeback of sorts with a changed business model and limited competition. The retail loan segment, which grew at a compounded annual growth rate (CAGR) of 50% between FY2003 to FY2008, almost went bust with fierce competition, overdependence on outsiders and regulatory changes.

This also led to exits or scaling down of operations by a number of players like ABN Amro, GE Money, Bajaj Finance, Shriram City Finance, Fullerton India and FamilyCredit.

IDFC Securities Ltd, in a research report said, "With fewer players focused on niches, pricing power seems to have returned to the financiers - who could now significantly curtail subventions paid to manufacturers and dealers. Mechanics of sourcing and collections, which are now handled in-house, have also tilted the risk-reward equation in favour of lenders. Importantly, emergence of credit bureaus like CIBIL and Experian have been a key enabler in protecting the quality of assets as lenders can now 'choose' their borrowers based on credit history.

"Going forward, we expect that the 'fresh-in-mind' outcome of cutthroat competition would prompt players to maintain a rational stance on pricing even as new players - albeit few in numbers - enter the business," the brokerage added.

During FY03, lenders used to earn a net profit of 1.7% to 3.6% for products like mortgages, car loans, two-wheeler loans, personal loans and credit cards.

 Source: IDFC Securities Ltd

However, with the emergence of cutthroat competition and price wars, the yields on consumer assets, especially for two-wheeler, personal and car loans fell 300 to 400 basis points (bps) over FY03 to FY07. Also during the so-called boom period between FY03 to FY08, lenders were using direct selling agents (DSAs) to offer the bulk of their loans.

Unfortunately, the lure of hefty commissions of up to 3% of the assets sourced made the DSAs to go in for more business without strict quality checks. This coupled with regulatory forbearance, which restricted forceful recoveries, and the cyclical economic slowdown triggered wilful defaults.

Some players who burned their fingers during this period decided to exit the retail loan segment while a few opted for the consolidation route. Globally, manufacturers subsidise lenders to reduce end-consumer borrowing costs, but Indian lenders were following the exact opposite policy.

However, with the emergence of financial recovery and credit bureaus, the retail lenders are making a comeback. "Financiers now realise that inherent product profitability leaves no room for manufacturer or dealer subventions and therefore after FY09 and later, one can find that the dealer payouts have almost disappeared across segments," IDFC said.

Similarly, the proportion of retail loans secured through DSAs and direct marketing agents (DMAs) has come off significantly to around 1% of the assets secured. In addition, retail loan lenders now prefer to source as well as collect through their own employees instead of DSAs and DMAs. This branch-banking model seems to be helping lenders to protect asset quality.

In addition, the emergence of credit bureaus, like CIBIL and Experian who provide complete information on a borrower is also helping retail lenders to choose the right customer. CIBIL, the country's largest credit bureau, covers around 16 crore loan accounts and around 9.5 crore customers, with contributions from about 255 members, including banks and non-banking financial companies (NBFCs).

India, which is home to one of the world's youngest populations, offers a perfect ground for expansion of retail loans. The country has around 48 crore people under the age of 40 years. However, the penetration of retail assets so far has remained low - at around 30%. This untapped demand coupled with the rebound in profitability for financiers, is expected to spur a boom in retail finance in the coming years.

"On the back of improving income demographics and thereby higher affordability, penetration of retail assets has been on the rise. We expect annual disbursements in the segment to accelerate to 29% CAGR over FY10-FY12 to about Rs4.2 lakh crore in FY12," the brokerage said.

According to the IDFC report, key beneficiaries of the recovery in retail financing would be Bajaj FinServ Ltd, Housing Development Finance Corp (HDFC), HDFC Bank, ICICI Bank, IndusInd Bank, LIC Housing Finance, Mahindra and Mahindra Financial Services Ltd, Shriram City Union Finance, Shriram Transport Finance and State Bank of India.


Is the pre-open trading session making the wrong moves?

The 15-minute window prior to market opening was introduced to enable price discovery and curb excess volatility in overnight prices. However, fears of manipulation remain as the skewed prices indicate

In the pre-opening trading session today, the Nifty was up 37 points at 9.05 am. At the same time, the Sensex was up only 33 points. Even before the Indian stock exchanges opened for business, however, most Asian indices were already in the red. Even the Nifty futures traded on the Singapore exchange was down 38 points. Strangely, none of this was reflected in the pre-opening session.

When actual trading started, the Sensex was up by around 40 points. Within minutes however, the Sensex was trading below its previous closing price and touched 19,840. Even the Nifty, which was quoting above yesterday's closing price in the pre-opening session, quickly slipped below that mark. Meanwhile, Singapore Nifty futures continued to trade lower. 

This is not just a one-time occurrence but has been happening regularly since the introduction of the pre-opening trading session a couple of weeks ago. This facility was introduced by the Securities and Exchange Board of India (SEBI) primarily to curb excess volatility in stock markets and enable smoother price discovery prior to the opening bell. Overnight tremors felt half-way around the globe caused the stock markets to open with a huge gap in either direction, which misled investors. The pre-opening session, where only notional trading takes place, was thought to inject some price sensibility before normal trading hours began. However, it is increasingly becoming apparent that the mechanism is just as susceptible to price manipulation.

The volatility between the two trading sessions continues to be high. On day one itself, when the mechanism was introduced, the markets experienced sharp fluctuations. The Nifty was up 50 points in the pre-opening trading session that day, while the Sensex was up around 10 points. When normal trading began however, the Nifty was down 20 points from its previous close while the Sensex opened 36 points higher.

The fact that the Nifty also was not able to find the right level was quite surprising. The NSE enjoys the highest volumes and liquidity in the equity trading arena and is said to be efficient in terms of price discovery. However, it is evident that price manipulation in the Nifty is just as prevalent as with any other exchange.

A broker told Moneylife that this divergence happens when traders take large positions in pre-opening sessions only to withdraw the same during normal trading hours. This gives the entire market a skewed picture. Alok Churiwala, managing director, Churiwala Securities believes that some miscreants will always try to create problems in the mechanism, but feels that it is a step in the right direction. "You can rein in manipulation but it is difficult to stop it. Mischief makers will do anything if they want to skew the picture. Atleast now, if there is wide divergence people will sit and think that something is wrong. Had this happened in normal trading hours, people would have been stuck at skewed prices."

Mr Churiwala feels that it will take some time for the new system to work out properly. "It is too early to pass a judgement. It will take some time for the system to seep into the DNA of investors."

He also believes that the mechanism will actually play out well when it is extended to other stocks and new listings. Currently, pre-opening trade is only limited to the Nifty and Sensex stocks.



arun adalja

6 years ago

two days back i was benefited by pre opening session as i sold tata motors at 1350 at 9.05 and at 9.25 it was 1305 so you have to take chance no doubt i am against this move.


6 years ago

you are right , even i observed this. This is a definite case of manipulation.

arun adalja

6 years ago

i do not understand why they started pre open mkt trading at 9am when there is hardly any trading during 9 to 9/15 even in reliance ind hardly 2000 shares are traded again similar scripts are not therein nifty and sensex exchanges and sebi wants to do experiment on faltu things.

Deena Mehta

6 years ago

There is bound to be disconnect between BSE and NSE index in pre opening session. In normal market there is continuous shifting of exposures between the two exchanges at particular prices which is an equalising factor. In case of pre opening each market moves on its own demand and supply equilibrium hence prices are bound to be different since the the cross market transcations do not happen in absence of knowledge about the rate at which the actual trades will happen.

FDI in services sector dips about 50% to $1.26 bn in Apr-Aug

New Delhi: Foreign direct investment (FDI) in the country's services sector almost halved to $1.26 billion (Rs5,793 crore) in the first five months of the current fiscal, reports PTI quoting latest industry ministry data.

The sector that included financial and non-financial services, had attracted $2.48 billion (Rs12,068 crore) FDI during April-August 2009-10.

Crisil's principal economist D K Joshi said: "Given the global situation, there is a short-term pullback in FDI inflows."

However, Mr Joshi added that there will be a reversal of the trend in the next calendar year.

"India still remains a preferred destination for foreign investment and that is evident from the strong foreign institutional investors (FII) inflows we are seeing. There will be a bounce back," he added.

Overseas funds infused a whopping $6.11 billion in October, the highest amount brought in any single month by the FIIs since they were allowed for investment in local stocks.

The total inflows of foreign institutional investors (FIIs) so far in 2010 has crossed the $24.48 billion-mark, which is also a record investment came in a single calendar year.

India's services sector is good for investment," Mr Joshi said.

The overall FDI inflows in the country dropped by 35% to $8.88 billion in April-August 2010-11, against $13.76 billion in the year ago period.

The services sector, despite the 49.19% dip in FDI, still topped the chart in attracting maximum foreign investments.

The telecommunications segment, including radio paging and cellular mobile, was the second best sector that attracted $1.05 billion, followed by power ($677 million), metallurgical industries ($613 million), computer software and hardware sector ($458 million) during the period, the data said.

During the period, the highest FDI of $2.92 billion came from Mauritius followed by Singapore ($1.08 billion), the US ($636 million), Japan ($515 million) and the Netherlands ($481 million).

The government is making sustained efforts, including involving stakeholders in policy formation, to make the investment regime more attractive and investor friendly.


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