Mumbai: Recent changes in the consumer finance landscape are troubling brands and retailers, particularly as the festive season approaches. Banks and non-banking finance companies (NBFCs) are tightening credit access for individuals with multiple loans, especially in high-risk localities, to mitigate loan losses and improve credit quality. This shift is impacting sales across various consumer sectors, with industry experts sounding alarms over potential long-term consequences for the Indian economy.
Consumer Finance Tightens Ahead of the Festive Season
As the festive season draws near, brands and retailers are voicing concerns over restrictions in consumer finance, significantly affecting consumers with multiple loans. This shift is largely initiated by banks and NBFCs aiming to curb loan losses and enhance the quality of credit rather than merely increasing loan volumes. Industry executives are worried that these measures could have far-reaching impacts on their sales figures.
KV Sridhar, Chief Financial Officer of Tata Group’s AC manufacturer Voltas, noted during an analysts’ call that the consumer durables sector is facing multiple headwinds, one of the most pressing being the tightening of credit flow. Retailers are finding it increasingly challenging to offer attractive financing options to consumers, particularly as pressure mounts to maintain healthy credit portfolios.
Karnataka’s Regulatory Changes and Their Impact
In Karnataka, a significant regulatory change has resulted in over 700 localities, including more than 200 within Bengaluru, being effectively marked off-limits for consumer finance due to high default rates. This situation arose after the state government enforced a law that prohibits coercive recovery tactics by finance institutions. With violations potentially leading to hefty fines or extended jail terms, NBFCs are opting for safer lending practices.
Rajkumar Pai, Managing Director at Pai International Electronics—who oversees over 220 electronics and mobile phone stores—expressed concerns about how these restrictions are affecting legitimate customers. “Business is getting affected in Karnataka due to the difficulty of accessing consumer finance, with several genuine customers being left out,” he lamented. This situation is critical as consumer finance accounts for a substantial 50-65% of purchases for high-value items such as mid-to-premium smartphones, large-screen TVs, and appliances.
Rising Concerns Over Consumer Debt
Amidst declining consumer loan accessibility, industry leaders have redoubled efforts to manage customer debts. The MD of Bajaj Finance, Rajeev Jain, indicated that the company has seen a 26% increase in loan losses and provisions, now totaling ₹2,120 crore for the April-June quarter. He emphasized that multiple loans are a significant concern, as they often contribute to loan defaults.
Previously, around 14% of their customers held multiple loans, a figure that swelled to 21% but has since been reduced to 17% through rigorous monitoring. Jain suggested that this demographic is a primary pain point in minimizing loan loss and provisions.
Meanwhile, the Reserve Bank of India (RBI) reported that the outstanding consumer durable loans experienced a 3.9% contraction year-on-year, from ₹24,683 crore to ₹23,715 crore by the end of May. The previous year had seen a 15% growth, indicating a concerning trend for consumer lending overall.
Fraudulent Activities and Their Consequences
The tightening of credit standards has also been accompanied by an uptick in consumer loan fraud. Kailash Lakhyani, founder-chairman of the All India Mobile Retailers Association, highlighted an alarming trend where fraudsters purchase premium phones, like Apple’s iPhones and Samsung’s high-end devices, using credit and then selling them off for cash. Unfortunately, this creates a cycle of blame where innocent retailers are pressured for repayments they can’t recover.
The repercussions of these fraudulent activities have prompted NBFCs to increase their scrutiny of potential buyers, adding another layer of complexity to an already tense situation.
The Bigger Picture: Slowing Personal Loan Growth
The challenges surrounding consumer finance are not isolated incidents; they resonate across the broader personal loan market. As highlighted by Care Ratings, personal loan growth slowed to just 12.1% year-on-year in June, compared to a robust 25.6% a year earlier. The deceleration can be traced back to weakened demand across various segments, including housing, vehicles, and credit cards.
Analysts believe this slowdown stems from the RBI’s regulatory tightening and ongoing stresses within unsecured lending. As banks adapt to a new credit landscape, consumers may find their purchasing power significantly curtailed during one of the most lucrative seasons for retailers.
Ultimately, the current trajectory raises critical questions about future consumer behavior and spending in the Indian economy. Brands and retailers must navigate these challenges with caution while seeking innovative solutions to reconnect with consumers who are becoming increasingly wary of taking on additional debt.
Bankerpedia’s Insight💡
The tightening of consumer finance availability ahead of the festive season is a critical development for India’s banking and finance sector. This shift, driven by concerns over loan defaults, could greatly impact consumer spending—particularly on high-value products—stifling growth in key segments. As a result, consumers with multiple loans may find it increasingly challenging to access credit. It’s essential for individuals to assess their financial health and prioritize responsible borrowing to navigate this landscape effectively, ensuring they don’t fall into deeper debt while looking for festive bargains.
What Does This Mean for Me?🤔
- Salaried Person → Tighter credit restrictions may limit purchasing options.
- Business Owner → Consumer finance restrictions hinder sales and growth opportunities.
- Student → Reduced access to easy credit for student purchases.
- Self-employed → Difficulties accessing consumer finance may hinder business growth.
- Homemaker → Harder to access consumer loans for holiday shopping.
- Retiree / Senior Citizen → Tighter credit access may limit purchasing options for seniors.
- Job Seeker → Tighter credit may limit job seekers’ purchasing power.
- Farmer / Rural Citizen → Tightened credit limits farmers’ purchasing ability for essentials.
Research References📚
- economictimes.indiatimes.com
- RBI
- SEBI
- Ministry of Finance
- NABARD
- Department of Financial Services (DFS)
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