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Business Commentary/Dilip Thakore

India's hire-purchase and credit boom could sputter out prematurely

The subject of this latest sermon is the remarkable and unprecedented hire-purchase boom which is sweeping the nation. And the shabby, ham-fisted manner in which most companies in Indian industry are managing it and squandering great opportunities to create -- and more importantly retain -- customers.

Open the pages of almost any daily newspapers and you are likely to be overwhelmed by advertisements offering cars, scooters, motorcycles, refrigerators and television sets on instalment plan payment, that is, on hire-purchase. Today, almost every consumer durable is available on hire-purchase. Moreover, housing finance loans are easily accessible to the nation's fast-expanding middle class and credit cards have made even restaurant meals available on the instalment plan.

Though it's perhaps not so obvious, the spread and easy availability of hire-purchase is perhaps the most significant socio-economic change to impact post-Independence India. And it is pertinent to note that the national credit and hire-purchase boom is of relatively recent origin. The ubiquitous credit card stopped being a rare luxury facility available only to the supra-rich in the late 1980s. And hire-purchase options for a whole range of consumer durables is a mid-1990s phenomenon.

Though the fact that the prosperity of the affluent West was built on hire-purchase which generated mass demand, mass production, and mass employment was undoubtedly well-known to our omniscient central planners, it is one of history's great mysteries why hire-purchase was such a long time in coming to India. My own analysis of this inadequately researched subject is that the omniscient pundits of the Planning Commission decreed the canalisation of the nation's not inconsiderable household sector savings into infrastructure projects (the temples of modern India) and severely restricted the production of consumer goods, especially durables, through the rigorous licence-permit-quota regime of yesteryear.

In the event, central planning was a disastrous failure for the simple reason that national savings were canalised into black-hole public sector enterprises managed by clerks rather than businessmen.

In the circumstances, it is hardly a coincidence that India's hire-purchase and consumer spending boom gathered momentum after industrial licensing (and monopolies legislation) was abolished in the historic budget of July 1991. Freed from the formidable task of having to run to New Delhi for permission to produce everything from a pin to a jet plane, Indian industry has belatedly scaled up production in an ongoing attempt to attain the economies of scale. With a large number of companies having entered the consumer durables and automotive manufacturing industries in particular, there has been a spectacular increase in production. Hence, the hire-purchase boom to stimulate consumer offtake.

But though Indian industry has realised the business building potential of hire-purchase, it hasn't been able to shake off its contempt and indifference for the consumer which is the hangover of the perpetual shortages bred by the long era of licence-permit-quota raj. Indeed the vast majority of corporates and finance companies which offer instalment payment and hire purchase facilities do so in such a slipshod manner that they are likely to nip the reluctantly growing (Indians tend to be generally credit averse) hire-purchase phenomenon in the bud.

The usual methodology for initiating a hire-purchase transaction is for the finance company or the retailer to demand post-dated cheques from the purchase. Sometimes, the duration of the transaction stretches over 36 months. But my experience with the largest hire purchase company in the country (Countrywide Finance) was dispiriting. And my investigations indicate that I am not the only dispirited hire purchaser.

Once the post-dated cheques were signed, I never heard from the company again. I would have thought it common courtesy if not good business practice for the company to send me a periodic statement indicating the amount paid and the balance due. The next time I heard from the company was when, having forgotten all about the transaction, I changed my account to another bank. Thereupon, I received a legal notice for a bounced cheque and had to pay a stiff penalty. Not surprisingly, I preferred to pay off the entire balance amount and severe my connection with the company which, please note, had been charging me a hefty 25 to 30 per cent interest on the loan.

Likewise, the credit card companies are antagonising a large number of actual and potential customers by charging unconscionably high rates of disguised interest apart from initial issue and annual fees. Not many people in this country are aware that abroad issue and annual fees are unknown. Nor are credit card owners likely to discover that the basis points interest charged by the card issuing companies translate into interest rates nearing 36 per cent per annum on the balance due.

Given a prime lending rate of around 16 per cent, such high rates of interest are a rip off and/or indicative of high overheads and business inefficiency. Little wonder that only 2.5 million credit cards have been issued in this country which has a potential of 60 million card owners.

Indian corporates and finance companies need to realise that when a customer transacts a hire-purchase or instalment payment agreement, the transaction offers the company a great opportunity for relationship building and creating a customer with the potential of offering lifetime value and patronage.

Collecting post-dated cheques in advance, charging high disguised rates of interest and forgetting all about servicing the customer, is a formula designed to transform a customer into an antagonist. Unless corporates and finance companies develop a caring customer orientation, India's hire-purchase and credit boom could sputter out prematurely.

Dilip Thakore