A PROJECT REPORT ON

SUBMITTED BY: DIKSHIT PAREKH RASHMEET SALUJA VARUN MISHRA ANISHA SUBRAMANIAN ABHRAM JEYRAJ RONAK GALA SANDEEP GUPTA GOMATHI THEVAR

INDEX
INTRODUCTION MEANING OF CONSUMER FINANCE TYPES OF CONSUMER FINANCE PRODUCTS OF CONSUMER FINANCE SOURCES OF CONSUMER FINANCE CONSUMER FINANCE IN INDIA REASONS FOR GROWTH IN CONSUMER
FINANCING

CASE STUDIES FUTURE OF CONSUMER FINANCE

 CONCLUSION

INTRODUCTION
The buy-now-pay-later culture is still fairly emerging in India. Even today, there exists a generation and segments of consumer who might prefer to accumulate funds rather than take it on DEBT. But then again, the choice is a recent one. Earlier, in our capital scarce economy, there was not enough credit available for industry, let alone for the household sector. Today the corporate sector is flush with funds and banks as well as Consumer Finance Companies (CFCs) seem to have a surplus of funds to lend. It is true that today, the consumers have relatively a wider range of alternative products to choose from compared to the past. The Indian consumer is fast changing his habits borrowing money to buy things he wants and not merely those he can currently afford. The consumer finance is a win-win system in which everyone wins. For the consumers it is an opportunity to upgrade standard of living here and now instead of waiting for years of savings to accumulate. For manufacturer, consumer finance stimulates demand and brings down inventories. For dealers it is one type of sales booting. For finance company it is profit generation. DEFINITION OF CONSUMER FINANCE The term consumer financing refers to Any kind of lending to consumers by the banking sector and financial institutions. In simple words, It is a type of service that is designed to provide the individuals with necessary finance for personal purchases ranging from buying a car, shopping purchases, to buying a house.

The concept of consumer financing is based on the need for an institutional arrangement that provides consumers with financing support to enhance their consumption and, as a result, improve their standards of living. Consumer finance has to do with the lending process that occurs between the consumer and a lender. In some instances, the lender may be a bank or financial institution. At other times, the lender may be a business that offers in house credit in exchange for the business of the consumer. Consumer finance can include just about any type of lending activity that results in the extension of credit to a consumer. This includes a wide variety of loans, including credit cards, mortgage loans, and auto loans, and can also be used to refer to loans taken out at either the prime rate or the subprime rate.

TYPES OF CONSUMER FINANCE:There are various types of Consumer Finance. Some types of Consumer Finance arises from the purchase of high priced items. Some form of Consumer Finance, in which lending institutions especially a bank approves a predetermined credit.
TYPES OF CONSUMER FINANCE

Based on Schedule for Repayment

Based on Approval for Money Transaction

Based on Mode of Payment

Installment Payment

Single or NonInstallment Payment

An Openended CF

Closed Ended CF

Direct Money CF

Retailer CF

Check Credit Plan

Installment Plan

30 days CF

Revolving CF

Bank Credit Cards

The types of consumer finance can be categorized as follows:A. Based on Schedule for Repayment: It has further divided into two types of consumer finance.

I. Installment Payment: This Consumer Finance usually arises from the purchase of high priced items viz., TV, washing machine, and freeze, etc. The buyer does not have to pay the entire amount at once. Repayment is then made in installments over several months until the debt is retired. The number of months may be 6, 12, 24, and 36 as case may be. II. Single or Non-installment Payment : According to this scheme, customers are required to repay entire debt in single or one payment. B. Based on Approval for Money Transaction : This type of Consumer Finance is further divided into two types of consumer finance: I. An Open Ended Consumer Finance : It is available up to some pre-set amount without approval for each transaction. The borrowers may apply for initial approval from a lender agreeing to the terms of the Consumer Finance and repayment. Generally, after approval customer receives an identifying number that can be used whenever customer needs credit. Example in this category of consumer finance is credit cards. II. Closed Ended Consumer Finance: It requires approval for each transaction. That amount can be added to the previous credit financing without a new agreement between customer and lender. C. Based on Mode of Payment : This type of Consumer Finance has been also further classified into two subtypes as follows: I. Direct Money Consumer Finance: This Consumer Finance is extended to consumer by lending agencies of finance institutions. The consumers can use the borrowed money to purchase the desired items. The various plans available to consumers in this category of Consumer Finance are as follows:a) Check Credit Plan : It is a form of open-ended consumer finance, in which lending institutions especially a bank approves a

predetermined credit. When customer overdraws account, it automatically triggers to loan. So long as the payment schedule is met and authorized limit of Consumer Finance is not crossed customer can continue to increase the loan. b) Installment Loan : It is often used to meet needs over a longer period than the single payment loans for several years like1, 2 or 3 years. Periodic payment tries to match customers ability to repay with size of the loan to be satisfied. Finance charges for these loans depend on the source, amount and timings of loans as well as value of collateral offered. II. Retailer Consumer Finance : The retailer Consumer Finance is directly related to sale of product. Seller of goods and services offers it. The retailer Consumer Finance has been further classified into three categories as follows: a) 30 Days Consumer Finance: The amount owed must be paid within a set time, usually thirty days. The charge for credit is included in price of product for service. Most of Indian families use this type of retail credit Consumer Finance for purchase of milk, newspapers, food grains, monthly rent payment to servant, washerman, etc. b) Revolving Consumer Finance: It helps customer to continue purchases and pay whole or a part of the balance owed each month. It has certain advantages and disadvantages. First, it enables purchase of a large rupee volume due to extended repayment period. Second, this account is easy to use. Once the account has been opened, the customer is free to buy without having credit rechecked with each purchase. The disadvantage of this type of Consumer Finance is that because of the ease and convenience of purchase, customer may over purchase and thus he remains continually in debt to the retailer. Second, the rate of interest ranges from 1.5 per cent to 2 per cent per month.

c) Bank Credit Cards: The first bank credit card of the current type was issued in 1951 by Franklin National Bank of USA. The bank credit cards are convenient because of their wide acceptability and their centralized billing system regardless of where purchase is made. There is only one monthly bill. Master card, BOB card, StanChart, Citibank Card, is examples of bank credit cards.

PRODUCTS OF CONSUMER FINANCE

Consumer financing is broadly categorized into the following four types of products: Personal loans Auto loans Housing finance Credit cards Personal Loans: Personal loans include the loans provided to individuals for the payment of goods, services and expenses, and include running finance as well as revolving credit to individuals. The running finance is a credit facility established for a specific time limit at variable interest rates whereas revolving credit is a line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. Besides, in revolving credit, the loan is repeatedly available up to a specified amount as periodic repayments are made. Auto Loans: Auto loans include any loans used to purchase a vehicle for personal use. The loans borrowed to purchase vehicles for commercial or corporate use are not included in this category. Housing Finance: Housing finance includes the loan, which is provided to individuals for the purpose of purchasing or improving a residential house, or apartment, or land. This category also

includes loans for a combination of housing activities such as loans for purchase of land plus construction. Credit Cards: Credit cards include any card, which a customer can use to borrow credit from a bank. According to the PRCF, credit cards include charge cards, debit cards, Stored Value Cards (SVC), and Balance Transfer Facility (BTF). Supplementary credit cards are considered part of the principal borrower according to the Prudential Regulations, whereas Corporate Cards are not included in this category.

SOURCES OF CONSUMER FINANCE: Life

The various sources of consumer finance available to people Insurance are discussed below: Consumer Finance Companies Life Savings and Consumer Insurance Loan Finance Corporation Association Companie Sources of s Funds Credit Union Credit Card Commercial Institutions Banks 1. Commercial Banks : Commercial banks have a keen interest in providing, directly or indirectly, the finance for consumer durables. Banks also lend large sums of money at wholesale rates to commercial or sales finance companies, Hire purchase concerns and other such financial intermediaries. Recently, banks have also started directly financing consumers through personal loans, which are meant for purchasing consumer durable goods. Personal loans are granted without a security. They are cheaper than hire purchase credit. Banks a high-risk area, commercial banks ventured into the business of consumer credit very late. It was in the year

1978, when the National City Bank of New York in the U. S. opened the first full-fledged consumer credit department. Now with the advent of consumerism, banks have started participating in the consumer finance in a big way. The commercial bank offers loans to qualified individuals on secured and unsecured basis. Secured loans are based on security of collateral like cash surrender, gold, jewellery, real estates etc. The unsecured and single payment loans require only a customers signature on a loan paper. The loan papers have contents like repayment schedule, amount, due dates, etc. It includes various types of loans like the regular loans, credit cards and check credit. The important advantages of this source are as follows: i. Mostly the rates of interest charged are usually lower compared to other Consumer Finance schemes. ii. It increases credit rating with a bank in case of favourable repayment without default. The important disadvantages of this source are as follows: i. It has rigid requirements to qualify for availing of consumer loans. ii. It often avoids small-unsecured loans, as they are not perceived to be profitable to handle by the commercial banks. The consumer durable companies enter into strategic alliance with Nationalize Banks in the public and private sector. Example: 0% interest finance on all ONIDA color TVs being serviced by countrywide finance, Bajaj auto finance, Trans Apple distribution and ICICI. 2. Consumer Finance Companies: Consumer finance companies, also known as small loan companies, personal finance companies or licensed lenders, are non-savings institutions whose prime assets constitute sale-finance receivables, personal cash loans to consumers, short and intermediate-term business receivables, etc. These finance companies charge substantially higher rates of interest than the market rates. Consumer approach them as a last resort. Such companies run an equal risk of high collection charges too. It includes

leading companies like Countrywide, Whirlpool, Apple, MAS finance, and Kotak Mahindra. The important advantages of this source are as follows: i. One can obtain small loans from CFCs. ii. It is easier to qualify for availing consumer loans for individuals. The important disadvantages of this source are as follows: i. The rates of interest charged are higher and they charge flat interest rates (16 to 20 per cent) ii. The consumers are required to pay high processing fees. Example: Onicra from Onida is a credit rating service for individuals in India. Facility for personalized loans Anz Grindlays. 3. Credit Union : A credit union is an association of people who agree to save their money together and in turn provide loans to each other at relatively lower rates of interest. These are called cooperative credit societies in India. The first credit union was started in Germany in the year 1848. These are nonprofit, deposit-taking and low-cost credit institutions. A borrower must be a member of credit union. The credit unions are set up on the basis of caste, employee, religion, nature of work etc., in India. The important merits of credit unions are as follows: i. The rate of interest is usually lower than other sources of consumer finance. ii. They offer small loans based on a signatures only. They do not need any collateral, and guarantors. The key demerits of this source of consumer finance are as follows: i. Many customers may not like to reveal their financial needs to other colleagues. ii. If customer is not or can not become a member of credit union he/ she cannot get loan from it. 4. Credit Card Institutions :

Credit card institutions arrange for credit purchase of consumer articles through the respective banks, which issue the credit cards. The credit card system enables a person to buy goods and services on credit. The credit card scheme operates in the following way: On presentation of the credit card by the buyer, the seller prepares three copies of the sales voucher-the first for the seller, the second for the bank or credit card company and the third for the buyer. The seller gives one copy to the buyer and the other is forwarded to the bank for collection. The sellers bank forwards all such bills to the card issuing bank or company. The bank credits the sellers account and debits the amount to the customers account. The buyer receives a monthly statement from the card issuing bank or company and the outstanding amount is to be paid within a period of 20 to 45 days without any additional charge. If payment is delayed, bank charges interest per year on the amount outstanding. 5. Savings and Loan Association : They mainly focus on home mortgage loan. It could offer loans only to those people who have saving account with the association. The consumer loan is provided against the account. It is also known as an account secured loan. The rate of interest charged is usually lower compared to CFCs but it is higher in relation to those charged by other sources of consumer finance. 6. Life Insurance Corporation : Life insurance policyholders can avail a loan in the amount of cash surrender value plus any accumulated dividend or interest from the insurance company. Such loans are called policy loans because the life insurance policy serves as collateral. The important advantages of this source are as follows: i. It is simple and easier to obtain loan from Life Insurance Corporation, ii. Their interest charge is based on outstanding loan balance. iii. It offers flexible repayment schedule.

The important disadvantages of this source are as follows: i. An amount outstanding is deducted from benefits paid to the policyholder in the event of death of insured. ii. A customer must be a Life Insurance Policyholder for getting loan.

CONSUMER FINANCE IN INDIA:

The consumer product market in India has under gone a sea change from what it was in 1980s to its present form. While liberalization has significantly contributed to this change, the influence of factors like going awareness among consumers, rising disposable incomes, huge ad spend by big companies and availability of a variety of goods, etc. cannot be downplayed. Of late, there has been a sharp rise in the consumption behavior among the urban population, especially among the upwardly mobile middle-income group. This growth of demand for consumer durables gives a great opportunity to financial institutions to promote their consumer finance schemes. Consumer finance came up noticeably for housing and purchases of manufactured consumer products that are relatively high priced. The latent demand came from two categories of consumers those with capacity to consume and other aspirants not in a position to do so on their own. Consumer financing is an ongoing and rapidly growing marketing phenomenon in India. The old Indian maxim save for your purchase does not hold any longer. To be brief, organized consumer financing activities emerged in India with a pioneering efforts put in around 1980s by Citibank which launched a package known as Citi mobile for financing cars. Afterwards, the Citibank has also offered number of such other schemes for vehicles and in-house finance to facilitate quick buying of white goods. These efforts were responded by even American express but it did not picked up momentum due to their own financial and bad debts problems.

In case of the public sector, the State Bank of India has initiated move to keep private sector lender from appropriating the entire Consumer Finance for almost everything i.e. home, and cars to kitchen appliances. Although, the private sector till date occupies a sizeable market share of consumer financing in India. The recent most vibrant, open, global, liberalized and market-oriented new economic policy 1991 has opened floodgates for them. The liberalization wave in the early 90s saw the emergence of a new mainstream business literature through the evaluation of NBFC (Non banking finance companies) these companies enable hire purchase scheme for consumer durables, though actually no hiring is involved it is just plain consumer finance. The major players in the area of Consumer Finance consist of 20th century finance, classical finance services and SRF finance. The biggest merit of the area of Consumer Finance is that there are no entry barriers in it. One of the major developments that took place in 1995 with regard to execution of a joint venture between Countrywide Financial Services, and Housing Development Finance Corporation (HDFC). Some top players here are ICICI, HDFC, Citibank, Bajaj consumer finance, Kotak Mahindra, Bank of Baroda, etc. There are loads of offers available in market with different interest rates ,rates which are less attract consumers but still consumer go for higher rates charged by private banks because of good service and less complexity. There are two kinds of rates, which financial institute and banks charged: 1. Fixed Rate 2. Floating Rate Fixed or Floating? A decision on whether one should go in for fixed-rate or a floating rate loan now is functional of two factors: Customers perception of where interest rates in the economy are headed, and customers capacity to ride the interest rate charges. A floating-rate loan lets customer can take advantage of further falls in interest rates, but customer can stand to lose if interest rate rises again. In other words, floating rates make sense only when the interest rates are high and expected to fall. On the other

hand, a fixed-interest loan immunizes customer to interest rates jumps. If however, interest rate falls, customer can foreclose his loan and refinance it on a lower rate-either with other lender or increasingly, with the same one. Typically, fixed-rate loans come at marginal higher interest rate than floating rate loans: that is the price customer pay for not wanting to bear the interest rate risk

REASONS FOR GROWTH IN CONSUMER FINANCING

A combination of factors is responsible for the widespread popularity of consumer finance in recent years: The financial liberalization process over the last decade or so, has led to the creation of a banking system which is largely owned and operated by the private sector, and is free to allocate resources in response to the demands of a market based mechanism.

Secondly, the influx of liquidity in the banking sector since FY02 motivated banks to diversify and expand their earnings base by venturing into previously untapped areas. Thirdly, the easy monetary policy stance of the central bank from FY02 to FY05 provided eligible customers with financing options at historically low rates to meet their consumption demand. In this backdrop, consumer finance has emerged as one of the most promising asset products for banks. Providing access to purchasing power to the middleclass consumer has been the most significant achievement of this product class. Not only have people been able to raise their standard of living by purchasing various consumption goods which were previously treated as luxuries in reach of only a few, demand for these goods has also led the manufacturing sector to expand its capacity, such that both backward and forward linkages have contributed to the expansion in economic activities. Banks auto loans product and loans for consumer durables, for

instance, have been instrumental in this aspect. Though still small in proportion, the rising demand for mortgage finance reflects the individual consumers need and financial capacity, to acquire private ownership of housing units. Hence in promoting their consumer financing products, banks have played their due role in promoting economic development in the country. Prodigious Advertising One factor that has led to an incredible upsurge of consumer financing products has been the drastic reduction in the qualification benchmarks for premium products such as credit cards. For instance, back in the 1990s when consumer banking was still in its undeveloped phase, only three banks were offering credit cards and they were all multinational concerns. That was the time when the size of the total portfolio was a mere 200,000 cards. The scene all of a sudden changed when Bank Al Falah launched a no fee credit card and its consumer base ballooned to 100,000 new consumers. The success of no fee credit card was followed by low interest packages on automobile loans and home loans.

CASE STUDY COMPANY:

ON

CONSUMER

FINANCE

i. CONSUMER FINANCE IN CITIGROUP: Serving more than 8 million customers through more than 2,400 offices in the United States and Canada, CitiFinancial is the leading community-based consumer lender in North America. As an industry leader and member of Citigroup, CitiFinancial strives to set an example of excellence in the consumer finance industry. Commitment of citigroup: Since their founding in the United States in 1912, CitiFinancial has learned that there is no one-size-fits-all approach in helping people manage their money and their debt. CitiFinancial loans offer consumers a chance to improve their quality of life, while also improving their

credit. For some customers, a personal loan from CitiFinancial may meet their needs. For others, using some of the equity in their homes as collateral for loans for debt consolidation, college tuition or other important needs may be the best option. Regardless of the product, their employees are expected to follow the CitiFinancial philosophy, "Do the right thing, every time, all the time." That means working with their customers individually to find personalized financial solutions that meet their specific needsCitiFinancials more than 15,000 employees play an active role in the communities where they live and work. Volunteerism and financial support to community-based non-profits through Citigroup Foundation grants are part of the CitiFinancial way of life. Financial education is a natural extension of what CitiFinancial and its parent company, Citigroup, do every day. Bank support financial education because it believes access to investment products, credit and capital can raise the quality of life for individuals and families and strengthen communities around the world. Each year, CitiFinancial educates thousands of consumers about the types of financing available to them, both through one-on-one discussions in our branches and through work with consumer advocacy organizations. In addition, when making loans or offering optional insurance or other products, it makes sure that consumers understand their loan agreements by clearly and prominently displaying the terms of the products in CitiFinancial loan documents and marketing literature, through signage in the branch, and in discussion with applicants and customers. CitiFinancial Lending Enhancements in the United States: CitiFinancial has maintained high standards for its consumer lending. CitiFinancial announced a series of enhancements aimed at striking the right balance between providing access to credit for those who need it most while setting consumer protection standards that lead the industry. Implementation of these initiatives involved a massive effort that has included not just putting new programs and policies into place but also talking to their customers, community groups, elected officials, and regulators to figure

out how it can make these initiatives even more effective. The bank implemented these practices because it recognizes that it needs to establish trust among their community partners, and to show their commitment to setting the standard for the consumer finance industry. The CitiFinancial Lending Initiatives and Enhancements Include: Reducing the maximum points on real estate loans at their network branches from five to three points. Providing mortgage customers with a choice between a loan with a prepayment penalty and standard interest rate or a loan without a prepayment penalty and a somewhat higher interest rate. Prepayment penalties are for a maximum of three percent and reduce to one percent in the third year of the loan. Prepayment penalties are only imposed if the loan is paid in full during the first three years of the loan. Making loan decisions based on a borrowers overall creditworthiness, including ability to repay, and not solely on the equity in his or her home. CitiFinancial uses objective credit models to determine ability to repay. Following their "Customer First" program of informing customers of their rights and making sure they understand the credit insurance and other optional products available for purchase at loan closing. Implementing a "mystery shopper" program to ensure that CitiFinancial employees follow the highest compliance standards. Providing a toll-free customer hotline for customers to report any concerns with sales practices, discrimination, or other issues associated with predatory lending. Eliminating mandatory arbitration provisions in real estate-secured loan agreements.

ii) GE CONSUMER FINANCE

GE Consumer Finance Is a Leader in Providing Credit Services to Retailers and Consumers GE Consumer Finance offers clients a full range of operational, financial and analytic support, and develops customized marketing programs designed to increase sales and customer loyalty. This philosophy of partnership has helped it grow to over $18 billion in total assets and to serve more than 70 million cardholders. GE Consumer Finance is a leader in providing credit services to retailers and consumers. Formed in 1932 as a provider of consumer financing for GE Appliances, GE Consumer Finance provides private label credit cards, commercial programs and card-related financial services for hundreds of retailers and manufacturers across North America. GE Consumer Finance also issues and services corporate cards for commercial customers, including purchasing, travel and fleet vehicle cards. GE money India: A global leader in consumer finances. More than 118 million satisfied customers. A remarkable presence in more than 50 countries. Total assets worth more than US $ 105 Billion. In India, GE Money is a leading provider of financial services to suit varying needs. With joint ventures and customized products, GE Money adds value to its partners as well as individual customers. GE Money offers: 1. Innovative products to meet individual needs

2. Customized products for individual consumers and retailers 3. Easy access through 4500 outlets , Vast network across 60 locations in India 4. Product offerings include Car Finance, Home Loans, Personal Loans, etc. 5. Joint ventures with Maruti and State Bank of India GE Money Advantage: Apart from existing financial services, products of GE Money stand apart. This is because of the product features and our customer-Friendly processes. a) Reduced approval time b) Flexible documentation policies GE Money ensures that customers get an easy, simple and speedy experience. PRODUCTS OF GE MONEY: PERSONAL LOAN: GE Money Personal Loan offers customers easy access to money with minimum documentation, and offers customers maximum benefits: a) Customised loan options for both salaried and selfemployed individuals b) Higher loan amounts c) Competitive rates d) Easy documentation options e) Quick processing HOME LOAN: GE Money Housing Finance offers you complete solutions for all your housing related needs a) Home Loans upto Rs. 2 Crores b) Attractive interest rates c) Up to 85% of property value as loan d) Loans for ready to move-in residential properties e) Income Tax benefits f) Simple documentation and doorstep service CONSUMER DURABLE LOAN:

GE Money Consumer Durables Loans is your ticket to your favourite household products. GE Money Quick & Easy loans for consumer durables: a) Air-conditioners b) Television c) Refrigerator d) Washing Machine e) Invertors f) Mobile Phones g) Personal Computers GE money tie-ups with major appliances and electronics manufacturers allow to offer customer the best finance schemes. GE Money offers attractive benefits on all consumer durable loans: a) Easy EMIs to suit your pocket b) Special 0% schemes on select brands and models

CONSUMER FINANCING IN FUTURE:

It is true that because of increased awareness, entry of multiple players and induced wider range offering of Consumer Finance schemes for variety of buying needs, competition, market pressures, economic conditions and become customer-oriented and user-friendly. It appears that in near future battle of this rapidly growing potential market will be gradually influenced by credit and business in a big way. The credit card in fact takes care of crore need of Consumer Finance only, and offers revolving credit to consumers. It provides relatively increased flexibility tom opt for what should not be and what they should purchase with or without the help of credit cards. It calls for wider database, improved availability, and accessibility of information technology products and networks, and expanded markets to bring down effective rate of interest and payment and payment in flexible EMIs (Equal monthly instalments) as convenient and beneficial to consumers. The privacy of loan taker is best taken care of by using ATM (Automatic Teller Machine) credit card but it can met only accidental requirement and cost of such financing is felt to be very high by consumers.

CONCLUSION:
Consumer financing business in India has been on an uptrend recently and is expected to remain so in the future. Till now most of the growth has come from traditional channels of financing. But going forward, banks and NBFC alike need to search for other avenues for sustaining the momentum.
This growth can come from areas like developments in

rural finance, widened gamut of credit card offerings, education, partnerships with Multi Brand Outlets etc. In Asia Pacific, India has emerged as the third largest market for cars and MUVs i.e. only after Japan and China. The last few years have witnessed a high increase in students aspiring for management and professional courses, leading to a spurt in educational loans.