Where There Is A Spend, There Is An EMI

It is now harder to think of goods and services which can’t be purchased on EMI, or equated monthly installments, than those which can. At one end are consumers purchasing food, taking a cab and watching movies on credit. At the other end are those buying their first luxury tote bag or getting a lip job on EMI.

Loans pitched as “no-cost EMI” schemes with instant approvals, flexible tenors and multiple tie-ups are helping customers fulfill needs they probably didn’t know they had. The target segment is anyone with a regular income stream, particularly across India’s digitally savvy consumer base.

The latest such offering came from Aditya Birla Finance Ltd., which launched an EMI facility for dental treatments in partnership with the Indian Dental Association last week. Most insurance policies do not cover dental treatments. And so, ABFL thought it had found a gap it can address.

At times, dental treatments can be expensive and inconvenient, said Rakesh Singh, chief executive officer of ABFL. The non banking finance company plans to cater to the entire value chain — from financing dental treatments for patients to equipment that dentists need to treat these patients.

Aditya Birla Finance is not alone in targeting specific needs on EMIs.

Market leader Bajaj Finserv Ltd. appears to have covered all the bases. Its customers can avail EMIs for buying appliances, electronics or travel. They can also pay for beauty and spa services, hair restoration, bariatric surgery or weight loss through such EMI schemes.

Bajaj Finserv declined to comment on its product offerings.

Banks, though more conservative in their offerings, are also diversifying their retail loan products. The Indian Overseas Bank, for example, offers a term loan that it calls ‘IOB Passion’. The loan is intended to purchase materials to pursue one’s passion, according to the bank’s website. This could include sports kits, music instruments, painting material or other such items. It could also be used to pay for coaching fees to pursue the hobby.

IOB did not respond to queries on its loan products.

These loan schemes, while packaged and marketed innovatively, are essentially old wine in a new bottle. The underlying product being offered is an unsecured personal loan.

While an increasing number of NBFCs have started offering loans for unconventional products, most of them are variants of personal loans, said Naveen Kukreja, chief executive officer and co-founder of Paisabazaar.com, a loan-aggregating website. The interest rate and tenure of these special purpose loans are inherently similar to personal loans, he said. Hence, those wishing to take loans for financing such unconventional products and loans can consider personal loans as these do not come with any restriction on the end-usage of loan proceeds, he said.

How The Loans Work?

Since these retail loans products are essentially unsecured personal loans, rates are comparable.

The interest rates on such loans range from 11 to 24 percent per annum, similar to rates charged on a personal loan, Kukreja estimated. Borrower eligibility is established using parameters including the borrower’s income, credit score, job profile.

There are multiple ways in which such EMIs can operate, said credit bureau expert Parijat Garg. If it is a no-cost EMI, the customer may essentially be foregoing any discount on the product or service he or she would have otherwise availed. Another option often used by these service providers is the addition of the interest amount to the price of the product.

In cases where the manufacturers partner with financial institutions to co-promote a product, the manufacturer or dealer may compromise on profit margins, in the expectation of higher sales volumes, explained Garg.

In each of these instances, it is important that the customer reads the fine print, Garg cautioned. For instance, often, in case of ultra short-term loans, the customer does not realise that the interest rate she pays works out to 35- 40 percent on an annualised basis. In such cases, personal loans may be preferable, Garg said.

Risk vs Reward

Whether these loan schemes will prove to be prudent for lenders is yet to be established. In the past, unsecured personal loans have been associated with a higher risk of default, particularly in times of economic stress. This is because lenders have no underlying security to encash if the loan is not repaid.

But lenders pitching EMI-schemes for specific products believe these plans may prove to be more resilient.

Capping the end use, actually helps ring fence risk, said ABFL’s Singh. Catering to the entire value chain and using the relationship that the doctor has with the patient and with us, we expect the losses to be much lesser in the segment, he said. For instance, in the case of a dental loan tie-up, the application is referred by the doctor so there is some ‘moral responsibility’, Singh said. That reduces the risk drastically, he claimed.

That said, the behaviour of such portfolios will be monitored much more frequently to check for any build-up of risk. It is hard to imagine losses higher than in the general lending industry, Singh said, adding that the lender will course-correct if needed.

So far, the confidence has been borne out by the data, with delinquencies remaining relatively low. Data from TransUnion Cibil shows that delinquencies on installment-based unsecured loans remained between 1 to 3.5 percent as of the end of last fiscal year.

Can this trend continue? It might just, said Arundhati Bhattacharya, former chairman of State Bank of India.

According to Bhattacharya, there is now a plethora of data available for analysis and very valuable insights can be drawn from it. A company can use this data and technology ethically, and develop robust models, Bhattacharya said, adding that the retail credit-to-GDP ratio in India remains far lower than developed economies. To be sure, such loans are extended on the basis of a customer’s steady income flow and delinquencies can rise when income is affected, she said.