| Personal Loans - Differentiating the Clutter? |
In the prevailing ruthless competition, all the banks and financial institutions are very aggressive to offer you the loan amount you require at the earliest. They are sure enough that low interest rate is a major concern you would like to think twice before choosing a particular bank. But, is interest rate the only parameter that we take a look before we purchase (borrow) the loan? No, perhaps not. When our decisions are consciously analyzed by the elements of hidden costs, we are also unconsciously inspired to go for a lending institution by its service quality, financial branding and personal relations.
The US novelist Sloan Wilson once said, "It's not a question of who's going to throw the first stone; it's a question of who's going to start building with it". In our classic dilemma of what matters most after the same rate of interest in deciding a lending institution, it would be helpful to understand that every lending institute offers almost equal interest rate but they greatly vary in services, in transparency and also in the attitude towards their customers. Therefore, one way of approaching this dilemma is to follow this ‘Stone-Building’ way. In other words, one lending institution has got enough opportunity to offer their loans differently build on the same rate of interests of its competitors.
ICICI and HDFC, two major aggressive players in the retail loan segment charge 21 per cent interest rate (monthly reducing balance method) and 2 per cent processing fee of the loan amount. Both of these banks have got the pre-payment charge of 2 per cent. Also, ABN Amro operates in this level of 21 percent- 2 percent- 2 percent. In this case, how do you like to define the unequal demand and customer bases for these three banks for the same product of personal loan for a period of say, three years in a metro city in India?
Had it been the housing loan, everybody would have started calculating the hidden costs after deciding a set of banks that offer same rate of interests. Therefore, the next rational step to grip this dilemma is to admit that the second most important criterion in choosing lending institution is the hidden costs that you need to incur beside your interest rate.
Hidden costs are those in retail loans that you and I need to incur as additional charges to avail the services apart from the interest rates. Some of these hidden costs are not described by the lending institutions elaborately and we found ourselves to confront some unknowing costs sometime. For example, ‘penalties on bounced post-dated cheques’ is a hidden cost. In any chance, if you need to incur this cost, you would be bound to incur the ‘late payment charge’, ‘collection charge’ and ‘overall service charge’ also.
Now, in our approach to understand this dilemma, we found, hidden costs could be the second most deciding factor for an individual to choose a particular bank from a set where all offer the same rate of interest. Arguably, all the banks that operate in a same slab of interest rate, offer the same hidden costs for a particular type of loan, e.g. Rs 100 as penalties on bounced post-dated cheques, Rs 50 as late-payment charge, Rs 50 as collection charge and Rs 75 as overall service charge, amounted total to Rs 275. This amount may vary from Rs 250 to Rs 350 but it is hard to justify the unequal loan-customer bases for different banks. So what next after this same rate of interest and equal amount of hidden costs that make you decide to go for a particular bank or finance company?
These are in brief, geographical reach of a particular lending institution, service facilities like swift loan-disbursement time and minimum paper works (minimum formalities like no guarantor or no bank-balance slip), personal relationship with bank manager (or with a particular employee), peer group reviews (a leading newspaper may appreciate a particular bank or financial institute) and definitely the aggressive reference marketing (your immediate neighbor would be awarded by his lending institutes if he can make you take a loan from them). These all contribute together to decide the dilemma of ‘What Next’.
Jill Johnston, a US journalist and critic once commented in his "Lesbian Nation: The Feminist Solution" that "It's necessary in order to attract attention, to dazzle at all costs, to be disapproved of by serious people, and quoted by the foolish." And, all the lending institutions also practice the financial branding, the most deciding success factor for their products in line of what Jill said. They dazzle at all costs (massive awareness plan often exercised by theses lending institutes), they never try to convince all groups of people (Citibank targets only premium customers), thus get disapproved by some and they quoted by the foolish also (taking a loan from Standard Chartered would rule your esteem better that a loan product from a nationalized bank like United Bank of India).
ABN Amro, perceived (it wants to service only high net-worth clients) as a premium bank among middle-class Indians, lacks the rich network and thus may justify its low customer base for its loan products in comparable to ICICI or HDFC. HDFC, in turn may justify its wide loan-customer base against Citi Bank for its transparent interest slab against Citi’s two-tier slabs. Again, ICICI’s popularity for its loan products may be justified by its minimum paper works for loan sanction.
When, the intangible offerings also play a major role in our mind to purchase a loan product in this circumstances, every lending institute also exercise their own financial branding that inspires us, to go for a product consciously or unconsciously.
Tom Peters, in his ‘In Search of Excellence’, in 1972, mentioned "the excellent companies are a vast network of informal, open communications" in reference to his argument for the concept of "Organizational Fluidity". And the importance of simplicity also matters. Tom said, "Most acronyms stink. Not KISS: Keep it simple, stupid! One of the key attributes of the excellent companies is that they have realized the importance of keeping things simple despite overwhelming genuine pressures to complicate things". The dilemma of ‘What Next’ can be fixed in one way of what Tom mentioned. Everybody likes to have the simplicity of the process and wants to get convinced that his decision is the best. Informal communication between a lending institute and a customer, sometime also decide our purchase decision for a loan. Likewise, the simple understanding of EMI or hidden costs also makes us feel-good towards a financial institution.
Remember that joke: ‘A gang of witches broke into a blood bank last night and stole a thousand pints of blood… and police are still-hunting for the clots’. The search for the clots in this dilemma is still on. One may try to explain the entire scenario with a taste of management with how consumer behavior results into ultimate purchase backed by the voluminous research paper and one may try to establish the popularity of a loan product for a particular bank with human psychology; but it is still a million-dollar question that what matters most- financial branding or unconscious biased nature that may decide one’s preference to HDFC over ICICI for a financial product that comes at same cost.
Deepanjan Banerjee