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Festive Season Borrowers Need Not Fear Higher Rates, Tighter Liquidity

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Markets have turned volatile, bank lending rates have risen and non-bank lenders are facing tight financing conditions.

Will this mean that consumers looking to fund their festive season shopping through credit will find it tough to do so? No, say financiers and retailers who expect banks and larger non-banking financing companies to continue pushing easy credit schemes to capture strong demand conditions.

“Retail demand has continued to exhibit strong growth throughout the year and is expected to further spike during the festive season. We expect festive demand to be even stronger than last year,” said PK Gupta, managing director at State Bank of India.

While borrowing rates may be higher this festive season, attractive personal loan and credit card purchase schemes are likely to continue.

Rates: Only Marginally Higher

Since last year, the RBI’s benchmark policy rate has risen by 50 basis points. The increase in bank lending rates has kept pace with that, which means that borrowing rates are only marginally higher this year.

The country’s largest lender, State Bank of India, has raised its MCLR (marginal cost lending rates) four times since the beginning of 2018 in small doses. Cumulatively, the bank’s three-month MCLR has risen by 0.30 percent over the past year. The three-year MCLR has risen by 0.55 percent in the same duration.

Since a large part of the festive spending is on apparel, jewelry, home decor, gadgets and travel, loan ticket sizes are small. Given that these are small-ticket loans for a short duration, the higher rates have a limited impact in absolute terms, explained Gaurav Chopra, chief executive officer of IndiaLends, a digital lending marketplace.

Banks are also continuing to offer attractive schemes on credit cards.

For instance, HDFC Bank offered its customers an extra 10 percent off on purchases made during online retailer Flipkart’s ‘Big Billion Day Sale’ between October 10-14th. Peer ICICI Bank tied up with Paytm to offer 10 percent additional cash-back for Paytm Mall purchases made via the bank’s credit cards.

The schemes being offered this year are at the same level as last year, said Nilesh Gupta, managing director of retailer Vijay Sales. Since such cash-back and zero-EMI schemes normally involve splitting the cost of financing between the brand and the retailer, end customers will remain unaffected, he said.

Customers shop for a television at an eZone retail showroom in the Jayanagae area in Bangalore, India (Photographer: Namas Bhojani/Bloomberg)

Will NBFCs Pull Back?

Larger NBFCs, which have been aggressive in targeting retail finance over the last few years, are expected to remain aggressive in the festive lending market.

Considering that the festive season is almost on us, it is likely that there will be much impact of the concerns in some parts of the NBFC sector, said Raman Aggarwal, Chairman of the Finance Industry Development Council, an industry body for NBFCs.

Smaller NBFCs, however, may turn more cautious or be more selective about the customers they lend to.

Rajiv Ranjan, CEO of peer-to-peer lender PaisaDukan said that NBFCs which were lending to customers with lower credit scores of 650-700 may exercise come caution and shift towards lending to customers with higher credit scores.

Hemant Jhajhria, partner at PWC shared the view that smaller NBFCs may become more cautious this season. However, he does not belief that larger NBFCs like Bajaj Finserv and Capital Float would pull back in providing retail finance. Jhajhria added that a shortfall in finance, if any, would be made good by manufacturers who depend heavily on festive season sales.

Customers shop for jewelry at a store in the Zaveri Bazaar area of Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

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