Higher interest rates can mean risk of non-performing loans: Home Credit N.V's Mel Gerard Carvill

While consumer loans may be readily available, how does one get them cheap? Mel Gerard Carvill, Non-Executive Director and Board Member, Home Credit N.V, talks in detail with Business Today on things one should consider while applying for a loan.  

BT: How can one get a loan at the cheapest rate? 

Mel: The first thing to say that, unfortunately, poor people end up paying a higher interest rate, how can they get that a lower interest rate? Well, there are a number of big systemic things. And then there's a number of things people can do individually.  

So, in terms of what are the systemic things, the first and probably most important is to have a very good credit bureau infrastructure. And by that, I mean that all the people who lend money to people submit data to the bureau. If you have a very good credit bureau infrastructure, it means that when people come to lend, you have a really good data set to work from. Because you know exactly what the risk of taking on is, if you don't know that risk, you end up saying well, we have to assume the worst, and put a higher price.  

The second systemic thing is that you get cheap funding for the loan companies. A lot of loans are given by banks and non-banks, the banks use the deposits. But for other non-banks, they have to get funding in the wholesale market that can be 12-13 per cent. If you could drive that down, they can lend the money on cheaper rate.  

BT: How do you compare loans from really different providers?  

Mel: So, if you have a very good law that says you have to use in all advertising one type of interest rate the APR, then you can make that comparison. But if it doesn't, then it's quite difficult, because somebody might say an interest rate is 12 per cent. Somebody else says 10 per cent. Whereas, actually the 10 per cent is more expensive, because they've calculated in a strange way or not very honest way. So, as a consumer, you need to be very careful about working out what the interest rate is. And are there any other payments? Do you have to pay extra fees?  

There is another protection, which is quite important. We have it in our products, because it's a European requirement, there's something called a cooling off period. But it gives you a certain number of days to change your mind.  

BT: Is rising interest rates a concern? 

Mel: Post COVID, we were having inflation anyway, it's been accelerated by the war in Ukraine, because energy prices have rocketed and food prices are going up. And the end result of that is that central banks are raising interest rates to try to curb inflation. And what that means is the cost of borrowing for the main industry goes up. And so for companies like us, we might get a bit more income. But we might also have more non-performing loans. We have to be cautious, because higher interest rates can make it more difficult for people to pay back. And also, the other thing has to do with high interest rates, of course, is the risk of recession. If you have a recession, people get laid off, and they can't pay back their loans.  

BT: How is India fare in terms of regulations? 

Mel: Regulation has two purposes, there's the kind of prudential regulation to make sure the companies don't go bust. But in this case, the much more important regulation, is the market kind of regulation, make sure people are fully informed. Do they have all the information they need to make the right decision? Is there a law that forces the companies to give full disclosure? Is there a law that requires the companies to assess affordability? And so, in other words, are these companies regulated to make sure that the consumers are treated fairly. 

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