“We have given up trying to decode what Home Credit does,” said the founder of a company that helps non-bank lenders raise money.
To be fair, there’s nothing traditional about how the eight-year-old Czech Republic-based non-banking financial company (NBFC) has built its lending business in India. Home Credit, which came to India in 2012, has lent money to nearly 10 million Indians since. Except, none of them would be served by risk-averse banks or the more risk-embracing fintechs.
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.