BA 958 MERCHANT BANKING ANF FINANCIAL SERVICES
UNIT V - OTHER FUND BASED FINANCIAL SERVICES
Consumer Credit – Credit Cards- Real Estate Financing – Bills Discounting – Recent Developments in Factoring and Forfeiting – Venture Capital.
Table of Contents
CONSUMER CREDIT 1
Characteristics of consumer credit 3
Nature Of Consumer Classes In India 4
Consuming class in india: 4
Impact of consumer finance growth on consumer durables market: 7
Importance of Consumer Credit In India 10
CREDIT CARDS 12
Origin of Credit Cards In India 13
Types of Credit Cards Types of Cards : 14
Benefits derived from credit card 17
REAL ESTATE FINANCING 20
Factors Determining the Real Estate Finance Assistance 20
Steps In Discounting And Purchasing 24
BILL SYSTEMS 25
FACTORING AND FORFAITING 26
Features of Factoring 27
VENTURE CAPITAL 32
features of venture capital 32
Objectives 32
Venture Capital In India 35
Guidelines For Providing Venture Capital 36
Investment Pattern In Venture Capital 37
INTRODUCTION:
A consumer may obtain loan for the purchase of a vehicle, refrigerator, washing machines, etc., when a bank or any other financial agency provides loan to a consumer for the purchase of consumer durables it is called as consumer credit.
The consumer with his income is not in a position to repay the full value of consumer durables but would like to take advantage of his future earning and purchase them through installment payment to his creditor. By doing so, he not only enjoys the product, but he is also in a position to repay the value of the product. Hence, through consumer credit banks provide loans to enable the consumer to purchase valuable goods.
CONSUMER CREDIT
It is finance to consumers 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 semi-durables 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 EMI‟ s
Consumer Finance Transactions
The nature of consumer finance transactions may be
(a) Parties and structure of the transaction
The parties and the structure of the transaction may be either
(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 equated monthly installments 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 criterion 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.
• At the start of 1999, the size of the middle class was unofficially estimated at 300 million people.
• The middle class comprises of three sub-classes: the upper-middle, middle-middle and lower-middle classes.
• The upper-middle class has an estimated 40 million people.
• The middle-middle class has an estimated 150 million people,
• The lower middle class comprises an estimated 110 million people.
CONSUMING CLASS IN INDIA:
Source: National Council of Applied Economic Research (NCAER).
Estimated households by annual income Structure of the Indian consumer market (1995-96)
1. Data on income distribution of households is insufficient in determining market size for different consumer product in India.
a. This because of the lack of homogeneity of the consuming class and the varying prices of a single product in different parts of India.
b. Consumption habits of households are therefore better determinants of consumer market size than income distribution.
2. While determining market size for a consumer product, the structure of the consuming class as seen in the above, can be both revealing as well as misleading depending on the kind of product. For example, any specific consuming class would be fit to be a market for consumer products like tea or soap, but a product such as vacuum cleaners would find market largely only in the ―consumers‖ and ―rich‖ segments of the market as defined in the above table .
3. Identifying a plausible market size for a consumer product is therefore a hazardous task in a heterogeneous country like India. Yet, the marketer needs some data to come as close to the real picture as possible. For this purpose, it can be cautiously assumed that purchasing power is proportional to income despite variables such as location, taste etc. Companies are therefore advised to plan their consumer product marketing strategies on an area-by-area basis, rather than on the country as a whole.
4. Annual income (in Rupees) at 1994-95 prices
No. of households (in million)
<25,000 25,001-50,000 50,001-77,000 77,001-106,000 >106,000
Total no. of households: 80.7 50.4 19.7 8.2 5.8
164.9 million
Number Annual income of households (in million) (In Rupees) at 1994-95 Prices Classification
Urban Rural total <16,000 16,001-22,000 22,001-45,000 45,001-215,000 >215,000
Total no. of households Destitute Aspirants Climbers
Consumers The rich 5.3 7.1 16.8 16.6 0.8 46.6 27.7 36.9 37.3 15.9 0.4 118.2 33.0 54.1 32.5 1.2 164.8
4. Income data is insufficient. Therefore, it must be supplemented by product -specific information regarding its existing stock in the marketplace (in the case of consumer durables) and existing rate of purchases.
5. It is also advisable to further refine the plausible market size by taking into account details based on social, cultural and demographic factors.
6. Marketing a super-premium product such as a Rolex watch is relatively easy. Just go for the income class above Rs.2, 15,000 per annum (in 1995-96) as per Table above. This class, the table shows, comprises 5.8 million households. But the problem lies in the fact that the 5.8 million households are spread all over India.
7. The prime market for consumer products in India is aware of the cost-benefit or value for money aspect. Their concept of value incorporates socio-cultural benefits in addition to product utility. For example, many households in the ―consumers class and the ―rich class (as defined in Table) may have two television sets, but both the sets may not be top-of-the-line. Thus, while there may be demand for an additional TV set in many households in the two mentioned classes, it must not be mistaken as demand for the higher-priced TV models. The prime consumer market in India therefore is not a market for absolute premium products, but for something between the ―high end popular brands to the ―premium brands.
8. The class described in the previous paragraph is actually the ―consumers class defined in Table. This class comprises 33.5 million households as at 1995-96 and it owned and consumed‘most of the expensive consumer products such as refrigerators and washing machines as well as premium expendables. At 1994-95 prices, their annual household incomes ranged between Rs.45, 000 and Rs.2, 15,000 (to calculate the latest income statistics, use an annual inflator of 5 percent). In addition to this class, the ―climbers and ―aspirant classes (defined in the Table ) totalling 23.9 million households in urban India, also have the socio-cultural traits of the ―consumers class and, with time, will join the consumer‘s class. Medium-to-long-term marketing strategy must therefore aim at the aspirants and the climbers as well. This is based on the safe assumption that, except for the destitute class as defined in Table, the other classes are on the way to the next higher class. For companies with long-term marketing plans in India, the ―consumers (urban + rural), ―climbers (urban only) and ―aspirants (urban only) classes can be clubbed together to give a market size of around 57 million households which can be said to be the ―prime segment of the Indian consumer market. This becomes even truer as consumer finance and the credit card culture picks up. Fine-tuning between the classes is of course important.
9. Suppose you are marketing washing machines. Go for two broad types: fully automatic and semi-automatic. Target the fully automatic machines at the ―consumers class and the semi-automatic at the ―aspirant class, the ―climbers class will then over lap the market for both the types of washing machines.
10. All of the above may be confusing, but the marketing strategist has to live with it because that‘s how the Indian consumer market is in reality. There is hardly a characteristic that applies across the market. It would be more accurate to describe it as a collection of distinct consumer markets.
Latest Developments In Consumer Credit Changing Consumer Behaviour The behaviour 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, it‘s a sales boosting device for players of consumer finance, it‘s 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 consumer‘s present spending habits tend to be geared to expectations of future income. They are losing their
d. Fear of borrowing of consumer finance.
e. 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.
f. 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 Two-wheelers
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 two-wheeler 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. Two-wheeler 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.
• As a result of the large number of players, market pressures, 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.
• The Vijaya Bank offers V stock‘ for loans against shares; V equip‘ loans to help professionals acquire equipment and vehicles; and V-cash‘ to enable clean loans against salaries after getting an employer‘s guarantee.