Unit V CONSUMER CREDIT

It is a finance to consumer for the purchase of semi durables and durables by paying a part of the total Price Reavis Cox, an authority on economics of consumer finance defines consumer finance as Business procedure through which the consumers purchase semidurables and durables other than real estate, in order to obtain from them a series of payments extending over a period of three months to five years, and obtain possession of them when only a fraction of the total price has been paid.

According to E.R.A. Seligman, an authority on consumer finance, the term consumer finance refers to a transfer of wealth, the payment of which is deferred in whole or in part, to future, and is liquidated piecemeal or in successive fractions under a plan agreed upon at the time of the transfer.

CHARACTERISTICS OF CONSUMER CREDIT

The nature of consumer credit may be the transfer of wealth to consumers for purchase of semi durables or durables except real estate where the payment is deferred in whole or in part upon agreed terms the agreed terms for repayment may be in the form of EMIs.

Consumer Finance Transactions

(a) Parties and structure of the transaction (i) Bipartite (ii) Tripartite.

A bipartite transaction involves two parties i.e. 1. dealer-cum-financer and 2. Borrower or customer. A tripartite transaction involves three parties 1. The dealer 2. The financier 3. Borrower or customer

Transactions can either be structured in the form of hire purchase, conditional sale or credit sale, but a majority of the tripartite consumer finance transactions are of the hire purchase type.

(b) Payment for the transaction

The payment for specific transactions is divided into two categories: (i) Down Payment Schemes (ii) Deposit Linked Schemes

 The down payment varies from initial payments ranging from 20%-25% of the value of goods and financing is available for 75%80% or as the case may be. In a deposit-linked scheme, the down payment in the form initial deposit varying from 15% and 25% of the total value of the asset. The financier pays the full amount to the seller. Deposits carry a prescribed interest rate. Zero Deposit schemes are also available, under which the Equated Monthly Installment (EMI) is higher than the EMI under normal deposit schemes.

(c) Repayment Period

The repayment period ranges from 12-60 months. Finance companies notify the customer indicating the amount of EMIs to be paid through postdated Cheques.

(d) Security
The asset is secured through first charge on it for the credit provided. The borrower is prohibited from disposing, pledging or hypothecating the asset during above said credit period.

(e) Eligibility Criteria for Borrowers

There is no specific criteria for borrowers, all the borrowers in the form of individuals, partnership firms, private and public limited companies are eligible to borrow.

NATURE OF CONSUMER CLASSES IN INDIA

MIDDLE-INCOME CLASSES IN INDIA The middle income class refers to that class of people between the lower income groups and higher income groups. The need to study the middle income class in India was felt because the consumer finance was absolutely designed to meet their financial requirements and in turn upgrade their standard of living. Moreover the total population of middle class in India exceeds more than 2/3 rd of the total population.

 India has registered a very impressive growth of its middle class a class which was virtually nonexistent in 1947 when India became a politically sovereign nation. the start of 1999, the size of the middle class was At unofficially estimated at 300 million people. middle class comprises of three sub-classes: the The upper-middle, middle-middle and lower-middle classes. upper-middle class has an estimated 40 million The people. middle-middle class has an estimated 150 million The people, lower middle class comprises an estimated 110 The million people.

Latest Developments In Consumer Credit Changing Consumer Behaviour

The behavior of the consumers in India witnessed a remarkable change esp. the attitude. The Indian consumer is fast changing his habits, borrowing money to buy the products he wants, not content with buying what he can afford. The resultant consumer boom is what market strategists explain as the key to the success of the Indian consumer finance market.

 a. Consumer finance today helps everyone to upgrade his standard of living right now instead of waiting for years for his savings to accumulate. For manufacturers, it stimulates demand and lowers inventory For middlemen, its a sales boosting device For players of consumer finance, its a means of profit generation. b. The culture of buy-now-pay-later is fairly present in India, evolving through various forms like consumer lending, consumer credit, consumer loans, friendly and family borrowings, daily payment schemes etc.

c. The basic objective of consumer financing is that the consumers present spending habits tend to be geared to expectations of future income. They are losing their fear of borrowing of consumer finance. d. Along with buying a home, consumers prefer consumer finance to buy home appliances and vehicles, opting for finance based on the rate of interest, administrative fee, processing fee, commitment charges, pre-payment penalty, types of facilities, standard and kind of services mix other terms and conditions. e. These are members of a growing breed of normally conservative middle-class Indians who are opting for consumer finance loans despite the high interest cost being charged.

IMPACT OF CONSUMER FINANCE GROWTH ON CONSUMER

DURABLES MARKET: The impact of consumer finance has a direct impact on the fortunes of the consumer durables market including two wheelers and passenger cars. This correlation is already clear from the surge in demand in recent times. Sales of cars would grow at an even faster 20% annualized, as the gradual decline in excise duties makes the vehicles more affordable.

(a) Passenger Cars and Twowheelers

Sales of passenger cars increased by 26.5% in the first half of this fiscal, owing to the lowering of excise duties in the general budget. The twowheeler industry grew by 8.9% during this period, much slower than the heady high-teens growth over the past two years,as the agricultural slowdown last year hit rural incomes. Twowheeler sales are expected to increase at a compounded 15.6% . Car sales would rise at an even faster 20%.

(b) Key Issues and Success Factors For the consumer finance companies to flourish, there is need to develop a credit information system, which will ease the process, making it faster and easier to determine the creditworthiness of customers. Ability to offer simple, convenient and innovative consumer finance products, a wide distribution network and choice of repayment tenor, documentation and loan offer. a result of the large number of players, market pressures, As increased competition, increased awareness and wider offerings consumer-financing activities need to become customer-oriented and user-friendly. One of the perceived problems relating to consumer finance is the absence of credit bureaus to rate the creditworthiness of consumers. As of now, the advent of information technology has paved way for sharing data about defaulters among private sector banks. Any loan proposal is based on this shared information before further process.

(c) Innovative Solutions

The banks are lending against collateral and have concentrated on small potential borrowers to achieve disbursal targets. Vijaya Bank offers V stock for loans The against shares; V equip loans to help professionals acquire equipment and vehicles; and V-cash to enable clean loans against salaries after getting an employers guarantee.

(d) Credit Constraint in Rural India for Consumer Durables

According to a new survey, Role of Consumer Finance in Rural India conducted by Chennaibased Anugrah Madison and Delhi-based Marketing and Research Team (MART), the future growth for consumer durable is Rural India.

e) Consumer Preferences
Indian consumers identify ease and speed of the loan application and approval process, as well as flexibility of evaluation procedures, as the key drivers of financing satisfaction. Consumer financing Satisfaction performance is measured by four factors : Application process (44 %); Approval and documentation (22 %) Finance advisor (18 %); and Loan value (16 %).

Importance of Consumer Credit In India

The following best explains the importance of consumer credit in India. (a) Increasing Risk in Corporate Lending (b) Housing Loans

 (c) Consumer Durables Banks have entered almost all the segments in retail finance. They are gaining share from NBFCs. Private Banks have started offering loans for lowticket items like consumer durables and two-wheelers, besides personal loans. Some schemes of some banks are given below : has struck a preferred-financier arrangement with carmaker Maruti, SBI and now markets these can loans from more than 2,000 branches. The bank has also tied up with Bajaj Auto and TVS Motors to finance two-wheelers. is offering 3-year two-wheeler loans at an interest rate of 10% across all SBI sales outlets of these companies. These alliances are significant, because they have extended the availability of car and two-wheeler finance to second-and third-tier towns. Axis Bank has tied up with Ford Credit as a preferred financer for Ford cars. Punjab National Bank has struck a similar arrangement with Hyundai. More such alliances are expected between carmakers and state-owned banks. These arrangements will drive strong growth in car finance market over the years to come.

(d) Reduction in Interest Rates

Falling interest rates, coupled with increasing loan durations, have substantially reduced the EMIs on retail loans, thereby making them affordable to more people than ever before. The commercial banks extends different functions to customers. The most important in the modern days are credit card facilities to customers. These facilities are not extended to not only customers in the urban areas or cities but also to customers residing in rural areas. Agriculturist are enjoying the facility of credit card and the card extended to them are called as green card.

CREDIT CARDS
Origin of Credit Cards In India

Types of Credit Cards

1. Charge Card 2. Debit Card 3. Deferred Debit card 4. Affinity card 5. Standard card 6. Classic card 7. Gold car 8. Platinum card (companies) 9. Best Platinum credit card (High Standard in consumer service) 10. Fleet Platinum credit card (zero liability guarantee for purchases) 11. Next card Platinum credit card (This is given to those with a good credit and it offers a low introductory rate. 12. Titanium card 13. Secured card (Savings Deposit) 14. Smart card

 Sim card in the mobile phone is an example for the use of Smart cards in the telecom sector. There are 3 types of Smart cards. Storage card has an inherent monetary value associated with it. Intelligent card acts as a store-house of information. Hybrid card contains a micro processor chip and a magnetic strip and bar coding.

 Other applications of smart cards consist of : (a) Public telephone (b) e-Commerce (c) Electronic wallet (d) Cable TV (e) Internet banking (f) Transportation This card can be used in different modes of transport. (g) In health card, a patients blood pressure, sugar, blood group and other Vital data could be obtained. (h) Miscellaneous, such as insurance, club subscription and school fees, etc.

Benefits of Credit Cards

Benefits derived from credit card The following persons derives benefits from the credit card system : (1) Customer (2) Seller (3) Wholesaler (4) Manufacturer (5) Commercial banks (6) Central bank (7) Government (8) Economy

BILL DISCOUNTING
Gets financial accommodation Drawer Seller Drawee Buyer Financial Institution

Deposits Commercial bill

Seller has 2 option

Best option

Discounting Bill

Wait till the date of maturity

Bcoz obtains ready cash to meet immediate business requirements

Features
1. Discount charge

Original Value

Margin

Advance granted by bank

Consider maturity period

2.Maturity
30,60,90,120 days.

Popular

3.Ready finance
Customer will get immediate finance from bank.

4.Discounting and purchasing

Discounting of bills Demand bills Purchasing of bills usance bills (charges are less immediately they collect cash from drawee) Dishonour of bill (debit customer account)

Steps In Discounting And Purchasing

1. Examination of Bill

The banker verifies

Nature of the bill Transaction Required documents + bill

2.Crediting Customer Account

Genuineness of the bill/ Fix credit limit Then credit customer account

3.Control over Accounts

No customer can borrow more than sanctioned limit separate register maintained.
Name of customers Limits sanctioned Bills discounted Bills collected Loans granted Loans repaid

4.Sending Bill for collection

Bill + Documents Duly stamped by the banker

Send

Bankers branch

5.Action by the Branch

Receipt of payment, collecting bank remits payment to the bank

6.Dishonour
Separate register Debit the account

BILL SYSTEMS
Drawer Bills System (Based on supplier) Drawee Bills System (Based on buyer credit worthiness)

BILL SYSTEMS
Drawer Bills System Drawer Bills System is characterized by : 1. Bills being drawn by the sellers of goods on the buyer of the goods 2. Bills being discounted or purchased at the instance of the drawer of the bills 3. The banker primarily taking into consideration the credit of the drawer of bill, while discounting or purchasing these bills This system of financing goods is quite popular in our country.

 Drawee Bills System Drawee Bills System is characterized by : a. The banker accepting the bill drawn by the seller at the instance of the buyer (the drawee) b. The banker providing assistance, primarily on the strength of the creditworthiness of the buyer The two types of the drawee bills system are as follows :

1. Acceptance credit system : Under this system, the buyers banker accepts the bill of exchange for the goods purchased by the drawee. Such a bill may either be drawn on the buyer or the banker. The banker also requires the borrower to show separately, the goods purchased under acceptance credit in periodical stock statements submitted to the banker.

2. Bills discounting system : Under this system, the seller directly draws the bill on the buyers bank. The buyers bank discounts the bill and sends the proceeds to the seller. The buyers banker will show the bill as bill discounted. under both the systems, the banker keeps a record of the bills, both accepted and still outstanding. This is to ensure that the advance sanctioned does not exceed the credit limit.The main advantages of the Drawee bill scheme are as follows :

1. Assured payment 2. Buying advantage 3. Safety of funds