The benefit of zero-interest loans

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Artem Popov | 18 Apr, 2017
India's strong economic growth and growing income are expected to increase consumer spending to USD 3.6 trillion by 2020. The maximum consumer spending is likely to occur in consumer durables.

The Indian consumer sector has grown at an annual rate of 5.7 percent between FY2005 to FY 2015. Annual growth in the Indian consumption market is estimated to be 6.7 percent during FY2015-20 and 7.1 percent during FY2021-25.

Rise in income levels, growing consumer aspirations and easier than before availability of credit has triggered strong growth in the sales of consumer durables such as panel TVs, notebooks and smart phones, split air-conditioners, frost-free refrigerators, and fully automatic washing machines in recent years.

According to India Brand Equity Foundation (IBEF), India is set to become the fifth largest consumer durables market in the world. By 2025, India would rise from the twelfth to the fifth largest position in the consumer durables market in the world; the market is estimated to have reached USD12.5 billion in 2016.

A recent study by the McKinsey Global Institute (MGI) suggests that if India continues to grow at the current pace, average household incomes will triple over the next two decades, making the country the world’s fifth-largest consumer economy by 2025, up from the current 12th position.
One of the attendant benefits of this growth in the consumer durables market has been the evolution of the consumer finance market India.

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 “price for borrowed money” while making purchases and repay only the ticketed price in several installments.These financing schemes enable customers, especially those with lower income levels, to use future income streams to buy sophisticated consumer products upfront and pay in installments over a period.

Zero-interest 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 from zero-interest products. Manufacturers gain bigger market share from the resultant boost to sales and increased consumer preference towards their brands.

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 Indian consumer finance market will witness a very highgrowth rate, offering a great opportunity to banks and NBFCs that offer diverse products such as zero-interest finance schemes targeted at all segments of the income pyramid, across multiple secured and unsecured loan types.

(Author Mr. Artem Popov is the Chief Sales Officer, Home Credit India. The views expressed are personal.)