Consumer Durables Underfinanced: Crisil

Consumer durables as an asset class seem to be underfinanced, as compared with other asset classes -- car and consumer vehicles, said Credit Rating and Information Services Ltd (CRISIL) in a study published in 'Crisil Insight'. The credit rating agency said though the consumer goods industry is likely to register a good growth in the long term, credit penetration is very low at 20 per cent. This offers a good growth potential for the consumer durables financing, Crisil said. The credit penetration is as high as 65 per cent to 80 per cent in case of the automobile business.

The Crisil study said that, given the small ticket size of consumer durables loans and the high cost of setting up distribution network, a high business volume is necessary for profitability.

 

The study says: "Therefore, effective utilisation of technology and building up a critical mass to minimise expense levels is necessary for success in this business. While currently the returns in this business are attractive, the increase in competition in this segment is likely to result in pressure on yields."

Crisil, however, warned that asset quality in consumer durables finance is a matter of concern and write-offs in this business are relatively higher as compared with financing of any other asset. It said: "Notwithstanding the benefits of risk diversification introduced by the small ticket size and large customer base, Crisil feels it is imperative for consumer durables financiers to maintain high yields in consumer durables finance assets vis-a-vis other asset classes, to adequately compensate for the higher expense and loan loss levels expected in the business."