Rise in income levels, growing consumer aspirations and easy availability of credit has triggered strong growth in the sales of high-value consumer durables such as panel TVs, split air-conditioners, frost-free refrigerators, and fully automatic washing machines in recent years.
Of the many schemes that have evolved to finance these purchases, interest-free schemes are the most popular: they currently account for about three-fourths of total consumer durable financing.
Consumers find these schemes attractive as they do not have to bear the interest burden while making purchases, making many high-value consumer products within the reach of low- and middle-income families.
Financing schemes enable customers, especially those with lower income levels, to use future income streams to buy consumer products upfront and pay in instalments over a period.
Consumer durables finance schemes are generally available at the dealer location (point of sale) or the showroom. The beneficiaries are not just customers – lenders, manufacturers, and retailers too benefit. Manufacturers gain from the resultant boost to sales and increased consumer preference towards high-margin products.
For retailers, footfalls go up, whereas an increase in the customer base helps lenders to cross-sell loan (personal loans, insurance, etc) products to consumers availing of loans for consumer durables.
The most popular finance scheme prevalent in the market currently is the 12/4 scheme, where the financier collects the amount for the first four months as initial down payment from the buyer and then disburses the full amount to the dealer. The financier then recovers the balance amount in 8 monthly instalments from the buyer. The interest and processing charges are generally paid upfront by the manufacturer to the financier. Typically, this amounts to 4.5-5.5 per cent of the product’s price.
Although growth in sales volumes of consumer durables in 2012-13 will be below the robust growth seen since 2006-07, we believe that increasing penetration of consumer durables financing will be one of the main factors fuelling purchases of consumer durables in the long-term.
In India, currently only a tenth of consumer durable purchases are financed by lenders.
Due to the larger ticket size of high-value products, finance penetration is higher for this category of goods. For instance, with an average ticket size of Rs. 24,000, finance penetration for panel TVs is at 22 per cent. By contrast, finance penetration for cathode ray tube (CRT) TVs and semi-automatic washing machines, which typically cost less than Rs. 8,000, is miniscule at 0.8-1.0 per cent. The consumer profile also influences finance penetration. Although both panel TVs and air conditioners are priced similarly, the relatively stronger customer profile (in terms of income levels) keeps finance penetration for air-conditioners lower.
We project the share of high-value consumer durables in total sales (in volume terms) to surge from 33 per cent in 2011-12 to 52 per cent by 2016-17.
High-value consumer durables are more likely to be purchased on credit; consequently, finance penetration for consumer durables is likely to improve over the same period from 10 per cent currently to 15 per cent over this timeframe. This robust trend will be reflected in overall consumer durable loans, which are likely to more than double, growing at 23 per cent CAGR over next 5 years.
Among various high-value products, panel TVs and split air-conditioners will be more popular, and account for two-thirds of total disbursements over the next 5 years. These products are much more expensive compared to CRT TVs and window air conditioners but are increasingly becoming the preferred choice of even relatively low income consumers. Therefore, we envisage finance penetration for these products to increase further in the next few years.
Consumer durable loans are more popular in southern and western India, as evidenced by the fact that high-value products account for about two-thirds of total consumer durable sales in these regions.
These regions, when put together, account for over 60 per cent of total consumer durable financing in the country.
Moreover, in both regions, organised retailers have a huge base, which supports point of sale financing and results in greater footfalls compared with traditional electronic retailers.
To sum up, while the long-term outlook for consumer durables financing appears robust, continued support from manufacturers (who are effectively bearing the interest costs currently) would be critical to sustain high growth. For finance companies, cross selling other loan products to consumers availing of durable financing would be vital for earning higher margins.
(The author is Director, Crisil Research, a division of Crisil)
