Subprime mortgages ready for India’s Home Credit game

“We gave up trying to decode what Home Credit does,” said the founder of a company that helps non-bank lenders raise funds.

To be fair, there’s nothing traditional about the way the eight-year-old Czech Republic-based Non-Banking Financial Company (NBFC) has built its lending business in India. Home Credit, which arrived in India in 2012, has since lent money to nearly 10 million Indians. Except that none of them would be served by risk-averse banks or the most risk-averse fintechs.

NBFC 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 their credit history). Transunion CIBIL, the largest credit bureau in the country, calls a score below 680 “subprime.” For banks, subprime borrowers are rock bottom.

India does not lack borrowers. But lending to those who have never borrowed or have a sketchy credit history is no joke. Companies have struggled to find the right business model to lend to this segment.

The Home Credit model is anathema to non-bank lenders in India. Here’s why:

  • It offers 0% interest rate to people looking to buy cell phones as cheap as Rs 10,000 ($139). Small loans come with margins that are too thin for most businesses.
  • It charges an average interest rate of 30% up to 55% against the industry average of 15-26% for personal loans.
  • It has 8% gross non-performing assets, well above the industry average of 3-5% assets not repaid on time.

Additionally, 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 score of 650,” said the founder of a consumer lending company, requesting anonymity because he would not comment on competitors.

Even so, the Czech firm has built up an Rs 8,200 crore ($1.1 billion) loan portfolio in India. In the fiscal year that ended in March 2019, it returned to profitability after eight years of losses. It also generated interest income of Rs 2,109 crore ($293 million) and profit of Rs 351 crore ($48.7 million). The previous year, it showed a loss of Rs 327 crore ($45.4 million).

Of India’s 10 million Home Credit borrowers, 55% have no credit history, said Marko Carevic, Marketing Director at Home Credit India. The rest, he says, are those with a credit history. But most of them have a history of defaulting or late in repaying a loan. If the loans don’t go south, the company might end up uncovering a conscientious borrower.