AUTOMOBILES EASY LOANS ARE DRIVING SALES * Seven out of 10 cars sold through loans * Auto loan industry is growing at 30 per cent annually * Most consumers upgrade cars by borrowing

"Last year saw finance schemes becoming a major tool for the consumer durable industry to push sales." Ravinder Zutshi, Vice-President, Sales, Samsung

On the first of every month, Sanjay Dayal, deposits his pay cheque in his bank. Just in time, for four post-dated cheques issued by him-one to repay his home loan, another for his car loan, the third for his TV and the fourth for his computer-are waiting to get encashed in the first week of every month. Dayal, 32, who works for a dotcom start-up, has borrowed close to Rs 14 lakh in the past two years. His father, a 65-year-old retired college lecturer, is not amused. For him, debt is a four-letter word and is best avoided. But Dayal Jr, young and fun-loving, has no such hang-ups. "There were certain things I wanted badly. Thankfully, I did not have to wait very long."

Dayal's attitude represents the changed mindset of many middle-class Indians. Borrowing money is wise, not a vice. They are buying houses, cars, consumer durables and going on exotic holidays and paying in instalments. Indulging them are a host of finance companies, bankers and manufacturers reeling under slow growth and inventory pile-ups. Says Chanda Kochhar, executive director, ICICI: "Consumerism is driving India's economic growth."

Consumer lending skyrocketed from Rs 20,000 crore in 2000-1 to around Rs 55,000 crore in 2001-2. ICICI Chairman and Managing Director K.V. Kamath estimates that it will touch Rs 80,000 crore this year. Besides cars and consumer durables, loans are now available for air travel, holidaying, even higher education. It's fly now, pay later.

TRAVEL & HOLIDAY Fly now pay later schemes attract holidayers * Air Sahara's seat occupancy up from 44 to 52 per cent after launch of credit scheme * Foreign package tours can be paid for in instalments * Almost 15 per cent of holidays are on loans

In the past three years consumer durables and automobile manufacturers have aggressively touted interest-free loans to attract customers. Says Ravinder Zutshi, vice-president, sales, Samsung: "Aggressive consumer finance kept the consumer durables industry afloat in 2001." Companies like Samsung, LG, BPL and Videocon launched zero-per cent interest schemes with repayments scheduled over one to two years. Their strategy paid off: 2001-2 closed on a brighter note than 2000-1. For instance, colour TV sales grew by around 6 per cent in 2001-2 as against flat sales the previous year.

This strategy also drove the growth chart of the automobile sector. Cars have always been financed and almost 60-70 per cent of the cars in India are bought on loans. But in recent years, auto manufacturers have been offering customers one-year interest-free loans. Maruti Udyog Ltd (MUL) even tied up with finance company Countrywide to extend loans. "The attractive zero-per cent interest schemes brought customers to our showrooms," says Jagdish Khattar, managing director, MUL.

The credit fever also spread to the services sector with airlines like Air Sahara and tour operators like SOTC tying up with financiers and credit card companies to offer their services at zero per cent interest. The gambit paid off. In 2001, Air Sahara tied up with Standard Chartered to sell tickets that were to be paid for over 12 months. Consequently, the airline saw its seat occupancy inch up from 44-45 per cent in October to 52 per cent in March this year. Alok Sharma, vice-president, corporate strategy, Air Sahara, is upbeat. "We will soon launch an improved version of this scheme and I hope to sell tickets worth Rs 25 lakh every day."

CONSUMER GOODS 0% interest schemes bring in customers * Eight out of 10 consumer goods are sold on loans * Finance schemes have lowered entry barrier for high-end models * Reach of credit finance up from 50 cities 3 years ago to over 150 now

"If it wasn't for credit finance, the automobile industry would have had a negative growth last year." Jagdish Khattar, Managing Director, Maruti Udyog

Three things helped shape this credit boom. One, dipping interest rates-from a high of 20 per cent five years ago to 0-13 per cent now-have made finance schemes more affordable than ever before. Second, the changing mindset of Indian consumers. "Borrowing has become a part of life rather than for emergency use," says Rashmi Chandra, associate director, KSA Technopak, a consultancy firm that tracks retailing trends.

The third but perhaps the most important factor is that banks are more than willing to extend personal and consumer loans today than they were a few years ago. Hit by the slowdown, the industry has cut down on borrowings. Commercial sector lending grew at 12.1 per cent in 2001-2 as against 18.9 per cent in the previous year. On the other hand, consumer lending has grown. Says Kochhar of ICICI: "We saw consumer lending as a natural diversification."

This diversification has bigger ramifications for companies and consumers. The easy availability of credit has allowed companies to introduce high-end products in the country that were difficult earlier. So today there are 50-inch colour TVs which cost up to Rs 1.5 lakh and feature-packed frost-free fridges of over 500 litres capacity that cost up to Rs 75,000.

This rush for consumer finance mirrors the trend in most developed countries. Consumer finance comprises just 2 per cent of India's GDP as against 40 per cent in south east Asia and 70 per cent in the US. That is an indicator of its enormous potential. Lenders like ICICI have notched an impressive growth in the retail financing business. Two years ago, its car loan disbursals averaged Rs 25 crore a month. This has now jumped to Rs 250 crore a month. Similarly, its home loan business is growing annually at an impressive 35 per cent. Not to miss out the credit card business which has grown from a monthly average of 5,000 new cards in 2000 to a lakh now.

But there is a catch in zero-per cent interest loans. Companies which lured customers with such offers have dented their bottom lines badly due to the interest burden.Companies like Samsung admit that the number of cash customers have come down from 30 per cent in 2000-1 to 20 per cent in 2001-2. An official of another company which offered interest-free finance, admits, "We are no longer flashing our zero-per cent interest scheme, but it is difficult to withdraw it."

For lenders, this also means a lot more backroom work because they have to track a larger number of small borrowers. Also, the industry expects more loans going bad. In fact, credit card companies are already witnessing defaults. The negative file on wilful credit card defaulters has swelled from 1,10,000 in 1999 to 3,00,000 today. "That may rise with the increase in credit card users," says Sameer Vakil, country manager, South Asia, MasterCard International.

It's a dangerous path but it seems the industry is on a one-way street.