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Embracing Asia's Riskiest Borrowers


Large international banks such as Citigroup (C), HSBC Holdings (HSBC), and Standard Chartered have been in Asia for more than a century. But they've carved out a niche mainly as purveyors of services to the wealthy, partly because of limits on their mainstream retail-banking activities. Now, as Asian nations liberalize their financial markets, foreign banks are taking another look at the lowest tier of consumer finance, so-called subprime lending. "Citi's move into consumer finance is a natural progression," says Ashok Vaswani, CEO of Citigroup's Asia Pacific consumer-banking operations.

Of course the subprime consumer-finance business is not without its challenges. Besides the obvious credit risks, regulatory hurdles are high because authorities don't want abusive lending practices to creep into the system. Nonetheless, the subprime business -- extending unsecured cash loans at double-digit rates to lower-income borrowers -- is booming. That's thanks to steadily rising incomes and expanded consumer lending by local lenders to meet demand. Now foreign banks, using advanced computer systems and extensive database networks for spot credit checks, are betting they can limit their risks in the subprime market. At the same time they offer competitive rates by leveraging their global scale and access to low-cost financing. Subprime can be a huge profit center, with spreads of 12 percentage points or higher.

Typical borrowers are Asia's new middle class: Hong Kong middle-managers, Indian schoolteachers, and Thai office workers who can't get bank loans because of their credit history -- or lack thereof. So to make ends meet or buy a small car or appliance, they borrow up to $10,000 from subprime lenders at rates of 18% to 24%. "Consumer finance is probably one of the largest untapped segments of the financial-services industry in Asia," says Alex Boorman, an analyst at research consultant Datamonitor PLC in Sydney

BRANCHING OUT

Regional banks are jumping in, too. Singapore's DBS Bank entered Thailand's fiercely competitive market last year through a joint venture with ShinCorp., the conglomerate controlled by the family of Prime Minister Thaksin Shinawatra. Edmund Koh, DBS' consumer-banking chief, says the bank is looking at several other Asian markets.

But the most aggressive subprime lender in Asia is CitiFinancial (C), the consumer-finance division of Citigroup. Until four years ago, Citi wasn't even a player in this segment in Asia. Outside Japan, already a mature market for consumer finance, Citi had a small business in the Philippines and India. But in the past three years, it has opened branches in Hong Kong, Indonesia, South Korea, and Thailand. Citi has 240 dedicated outlets so far and aims to have 1,000 in five years. "We are opening almost one new branch every other day in Asia," says P.S. Jayakumar, Citi's Asia Pacific regional head.

Citi has plenty of company. Last year, Standard Chartered bought Prime Credit of Hong Kong, a five-branch subprime lender, and is seeking to expand into other markets. GE Consumer Finance (GE), an arm of General Electric Co., is making subprime loans in India, Indonesia, and Thailand, and last year formed a joint venture with Hyundai Capital Services in South Korea. Meanwhile, HSBC says it will start subprime lending in India, Indonesia, Malaysia, and Thailand in the next few years, building on a tiny existing business in Hong Kong. For foreign banks subprime looks to be the hottest growth area for their next century in Asia.

By Assif Shameen in Singapore


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