The NBFC has lent to those below a ‘CIBIL score’ of 600—as opposed to a good borrower with a score of 750-900. (A CIBIL score is a three-digit numeric summary of one’s credit history). Transunion CIBIL, the country’s largest credit bureau, calls a sub-680 score “subprime”. To banks, subprime borrowers are the bottom of the barrel.
India has no dearth of borrowers. But lending to those who have never borrowed or have a sketchy history with credit is no joke. Companies have grappled to find the right business model to lend to this segment.
Home Credit’s model is anathema to non-bank lenders in India. Here’s why:
- It offers a 0% interest rate to people looking to buy mobile phones as cheap as Rs 10,000 ($139). Small-ticket lending comes with margins too thin for most companies.
- It charges an average interest rate of 30% going all the way up to 55% versus the 15-26% industry average for personal loans.
- It has 8% gross Non-Performing Assets—way more than the industry average of 3-5% of assets not paid back in time.
Besides, Home Credit goes where even most online lenders wouldn’t dare—with the exception of payday lenders Early Salary and KrazyBee. “We would never lend to consumers below a 650 score,” said the founder of a consumer lending company, requesting anonymity as he did not want to comment on competitors.
Even so, the Czech company has built an Rs 8,200 crore ($1.1 billion) loan book in India. In the financial year that ended in March 2019, it swung to profitability after eight years of losses. It also earned an interest income of Rs 2,109 crore ($293 million) and a profit of Rs 351 crore ($48.7 million). In the previous year, it showed a loss of Rs 327 crore ($45.4 million).
Of Home Credit’s 10 million Indian borrowers, 55% have no credit history, said Marko Carevic, chief marketing officer at Home Credit India. The rest he says are those with a credit history. But most of them carry a history of having defaulted or delayed paying back a loan. If lending to them doesn’t go south, the company could end up discovering a conscientious borrower. “We call them future prime,” said Sandeep Srinivasa, co-founder of a lending company called RedCarpet. It’s a risk, nonetheless.
A risk that isn’t unheard of.
Home Credit’s modus operandi, in fact, is similar to that of the most successful financial services company, Bajaj Finance Ltd. Bajaj has a market capitalisation of Rs 2,80,000 crore ($38.9 billion) and is the tenth most valuable company on the Bombay Stock Exchange (BSE). Both companies use a lower-priced product to acquire customers and then upsell costlier loans to them. They’ve both also built an offline network of retailers.
But the segment differs. “What Home Credit is doing is not out of the ordinary. But the segment it has chosen to do it in makes it stand out,” said the founder of the Mumbai-based fintech. In this segment, Home Credit has developed a unique playbook. One of high-interest rates, data from partnerships, high approval rates (of loan seekers), and low cost of capital.
Tilling the credit wasteland
Indians are getting more comfortable with taking credit. Case in point: the average ticket size of loans is trending downwards—for personal loans it was about Rs 95,000 ($1,320) last year, but this year, it’s down to Rs 35,000 ($486), according to Transunion CIBIL. There are enough financing options to pick from, and it’s showing.
In India, of the Rs 8,64,000 crore ($120 billion) worth of personal loans that were borrowed in the third quarter of 2019, only about 16.5% went to new credit borrowers. And 34.5% went to the subprime category, according to CIBIL, which has records on almost 555 million people.
The two segments—those without credit histories and subprime borrowers—that Home Credit is going after form a whopping 856 million of India’s population, according to industry estimates. But only a sliver of the Rs 48,00,000 crore ($667.8 billion) retail credit goes to them.
Different fintech lenders and upstart NBFCs are finding the right way to crack these two segments. Large NBFCs like Bajaj Finance and banks have cherry-picked the best of borrowers based on credit scores. About 111 million of them. The smaller NBFCs and online lenders are scrambling for profitable niches within the remaining 745 million.