Funding the boom

Mr Nagda is glad he was able to borrow money

Satya Nagda, 45, thought he was going to lose everything last year. The cornershop owner in one of Mumbai's small suburbs had run into bad financial trouble and lost a lot of money. Read original article.

A father of three, he could not afford to keep his fledgling business running.

The shop is his life. It provides him and his family with their only means of survival.

Then, he got a second chance, in the form of a $1,000 (£500) loan from Cholamandalam DBS, one of the biggest lenders in the Indian sub-prime business.

"I needed money to keep my shop aflloat", Satya says as he packs away a bag of groceries for one of his customers in his small cornershop.

"If I had tried to get a loan like this 10 or 20 years ago, it would have been impossible.

"People like me were never given loans from banks. I've been lucky. I got $1,000 I am paying it back over a number of years."

Financial failure

Getting a loan in India has never been this easy.

There's no real tried and tested way yet of telling what the credit history is of the customer Atul Pande, managing director of Cholamandalam DBS

But it wasn't always so.

As recently as three decades ago, if you lived in one of the back alleys of Mumbai and did not have a large salary or a reliable income, then chances are you would be overlooked for a loan.

Many had to turn to informal ways of borrowing money to find their way out of financial difficulties.

Borrowing from money lenders or pawning the family jewels became common place. But interest rates were exorbitant - at times over 100%.

There was also what analysts call the "shame factor" that stopped consumers from borrowing money officially.

Getting into debt was considered embarassing by many Indians. Encouraged from a young age to save their money rather than spend it, a frugal lifestyle was lauded during the days of India's planned economy.

Admitting you were not able to maintain a secure and consistent bank balance was basically admitting that you were a failure.

Intense competition

Times have changed.

In India's new economy, an opulent and flashy lifestyle is a sign of success.

Unless there is a huge global slowdown the credit boom in India is set to continue for a very long time Akhilesh Tilotia, Parks Financial Advisors

Borrowing money to buy a new car, a new home, or expand your business is no longer seen as something shameful. It is seen as savvy banking.

Banks and financial instutions in India are pulling out all the stops to capture all segments of the consumer loans market. But the sub-prime market in particular has attracted the interest of both foreign and local banks.

Cholamandalam DBS, the financial institution that Mr Nagda got his loan from, is a joint venture between Singapore's DBS Bank and India's Murugappa group. The firm now has more than 100 branches spread out across India, specialising in consumer loans.

But there is intense competition in the sub-prime market in India.

HSBC, GE Money and Standard Chartered are just a few of the foreign banks fighting for the business of Indian borrowers. Dozens of Indian banks are also involved in this business.

There are worries though that in the rush to add new customers, banks in India could overlook whether or not borrowers will be able to pay back their loans - sparking fears that India could be headed for a debt crisis of its own.

"In India, what we have is a rudimentary credit bureau," Atul Pande, managing director of Cholamandalam DBS, says as he gazes across one of his crowded branches in Mumbai.

"So there's no real tried and tested way yet of telling what the credit history is of the customer.

"That will change over time as the sector here becomes more sophisticated. Also,as competition for business increases, there's a risk that banks and financial instutions will over-lend to borrowers who have paid back their loans in the past, to try and attract them as new customers. That could endanger the customer because he may not be able to pay back this loan."

Lasting boom

But those fears are not affecting the credit card business in India, another form of lending to customers.

These people harass me by using bad words, and insult me and my profession Dr Girish Kulkarni

Although it makes up just a fraction of the consumer loans business, credit cards are a growing sector here, and it' is common to see youngsters whip out a plastic card to pay for their meal at a restaurant, or to buy a fancy new MP3 player in a shop.

India's attitude to credit is changing , yet some local financial services professionals doubt that this new mindset will set India up for a debt trap - the way we've seen in the US recently.

"I don't think so," says Akhilesh Tilotia, a financial advisor with Parks Financial Advisors.

"The difference between the US and India is that the loans in the US were asset-backed, and the value of those assets started to deteriorate. In India you don't have that situation.

"You also have an environment here where salaries are rising quickly, and are expected to continue rising. I think unless there is a huge global slowdown the credit boom in India is set to continue for a very long time."

Violent creditors

But there are those who have suffered as a result of this credit boom - and are now paying the price for it.

Girish Kulkarni, a doctor in Mumbai, took on a loan of $9,000 seven years ago to keep his medical clinic running.

He says he was cheated by a fraudulent bank agent who stole the money he borrowed from the bank by writing checks to himself. To reclaim its loan, Mr Kulkarni says the bank has sent people to threaten him to him.

"They have sent recovery agents to my house at least once every two months," he says during an interview in his clininc.

"These people harass me by using bad words, and insult me and my profession. It's insulting to hear such abuse, and I have felt very distressed by this entire incident."

Because there is no formal way of recovering loans here, many Indian banks have taken to the practice of outsourcing their debt recovery services.

There have been many reports in Indian papers recently of these agents harassing and at times even beating up or making threatening phone calls to customers who have not paid back their loans.

The Reserve Bank of India is looking into this, and it has been suggested that banks need to clamp down on such practices and be more stringent about who they employ to recover their loans.

But until stricter regulations are enforced in India's banking sector, Mr Kulkarni and his family are in for a traumatic time.

He has now taken legal action against the bank, and has lodged an official complaint over the tactics used by the debt recovery agents, but it is unlikely with the number of cases backed up in the courts here that he will get a swift resolution.

The strong economic growth in India has meant that banks here are in a rush to entice new customers.

But the worry is that in this race for business, the risks of a looming debt trap have not been accounted for - and regulations to protect India's borrowers have yet to be implemented.