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INDIA'S MR. CREDIT

MONEY IS THE NEXT THING PANTALOON'S KISHORE BIYANI WANTS TO SELL TO CUSTOMERS

By Curt Hazlett

Kishore Biyani is not one to be put off in the face of an obstacle. Since Biyani opened the first Pantaloons clothing outlet in 1997, his Future Group, of which he is managing director, has grown into India's largest and most diverse retailer, with some 450 stores. Along the way Biyani struggled with a national shortage of good retail space and his company's lack of capital, both of which he overcame by creating investment funds to finance shopping center construction.

Now that he has the shops, he is out to multiply the shoppers. How? By extending them credit, of which Biyani says there has been a critical shortage in his country. He is rolling out a store-financing program called Future Money to offer credit cards, car loans and financial planning services.

Of course, Biyani's idea is hardly novel in any of the world's more developed markets, where big retailers have long had private-label credit programs and financing operations. But in a country where credit card penetration is roughly 1 percent to 4 percent, he is attracting some attention.

Biyani told the India Retail Forum, in Mumbai, in September that these efforts are a critical step in Indian retailing if that market is to grow. "The consumption boom will drive the retail growth in India," he told the group, which honored him as India's Retail Face of the Year for the fourth consecutive time. "We need to look at innovative ways of making money available to the consumer."

Future Money will be part of Future Capital Holdings, an asset management and credit business that Future Group plans to take public early this year. The market certainly seems to be there. A 2004 report by Merrill Lynch estimated India's average household debt at just 4 percent of gross domestic product - a tiny fraction of the 60 percent figure in Taiwan and South Korea, to be sure, and even of the 25 percent in Thailand.

It is not that Indians are unfamiliar with credit. The use of credit has risen sharply in India in recent years, despite the reputation of its people as prodigious savers. Dina C. Roldan, a senior consultant at TNS Retail Forward, based in Columbus, Ohio, notes that Indian shoppers have historically bought items on credit in the mom-and-pop stores that have dominated the country until the recent rise of "organized" retail. "They are used to buying things on credit, but Biyani is taking this idea and growing it for the middle class by extending credit and allowing them to buy consumer goods," Roldan said.

Future Group was the first Indian retailer to launch a financing operation, but it will not be the last. Other retail chains, many of them part of large conglomerates, are beginning to take the same path. Reliance Industries, a giant that plans to invest $5.5 billion launching a multiformat retail empire across India, announced in October that it would team up with Citigroup on a nonbanking finance company to provide credit to Reliance customers.

Roldan says Biyani represents a small player in comparison to some who plan to enter the credit business, including Bharti Enterprises, which is working with Wal-Mart to create a chain of wholesale stores, and Tata, which is in talks with potential partners. "They are used to being in lots of businesses, and they are involved in real estate and financing," said Roldan, who has traveled in India and analyzed its retail outlook in a report titled Strategic Focus: India's Retail Landscape. Biyani "is leading the charge, but he's a little guy in the scheme of things."

Future Group and the other credit pioneers already have an emerging-markets model in Mexico's Grupo Elektra, parent of fast-growing furniture and appliance retailer Elektra, which has created a banking operation called Banco Azteca to offer financial services to its patrons.

Banco Azteca branches can be found in Elektra stores in Mexico, Argentina, El Salvador, Guatemala, Honduras, Panama and Peru, and the company plans to enter Brazil this year. Like India, Latin America has a low penetration of financial services among consumers and is considered a prime region for credit growth.

In a 2005 report, McKinsey & Co. predicted that India's income level will nearly triple over the next two decades and that its consumption across all income brackets will quadruple. Biyani hopes to tap into this spending by making it easier for Indians to finance consumer goods at the point of sale. He intends to create Future Money departments - in effect, in-house financial services operations - in each of Future Group's stores.

Sixty had already opened as of November. The first one opened in April in a HomeTown store, Future Group's home improvement format. The finance operation, taking up just 300 square feet in a 120,000-square-foot store, was a big success by Indian standards, the company says. It took in 100 loan applications during the first two weeks. In contrast to the nearly instant credit-approval process in the U.S., Future Money generally extends credit only after a visit to the applicant's home.

Future Group already offers a credit card in conjunction with ICICI, India's largest private bank. But Future Capital's initial-public-offering prospectus notes that the company plans to move the holders of these cards into its proprietary Future Card once the deal is completed. Analysts speculate that Future Capital may eventually become a full-fledged bank if India relaxes its banking laws, as many believe will happen. "It was inevitable that in a country where big retailing is nascent that consumer financing operations would be created," said Hemant Kalbag, principal of the consumer industries and retail practice of A.T. Kearney's Indian consulting operations. "I'm just surprised that it has taken this long."

Kalbag is a native of India who spent much of his career in the U.S. before returning to India two years ago. He says he once worked for a U.S. furniture retailer whose private-label credit card generated 50 percent of the chain's sales. As Indian consumers grow more sophisticated, such results are not going to be lost on retailers, Kalbag says. But most organized retail will not go the route taken by Future Group, he says. Instead, most will outsource their financing operations in ventures with banks, both Indian and international. London-based HSBC is already one of the largest providers of credit cards in India.

"Future Group is an interesting company," said Kalbag. "They have created a lot of expertise internally and have gone into a lot of tangential businesses. For the majority of retailers, starting a finance operation won't make sense."

These moves by the country's leading retailers are coming at a time of big change for consumers. Relatively few Indians have credit cards, though the number has grown sharply in recent years. This growth has not been without problems. Not until 2005 did the government pass laws to allow the sharing of consumer information by credit bureaus. This helped spread credit availability by reducing bank risk, but it also alarmed the conservative instincts of many Indians.

"The stage is now set for a grand credit circus wherein many unsuspecting consumers are lured into debt through inducements and then flung into a precarious trapeze dance with creditors, without a safety net to break their fall," fumed one op-ed writer in The Hindu, a national newspaper.

Some complain that the government has done relatively little to regulate credit cards, which can carry rates as high as 50 percent and often impose huge late fees as well. Many consumers are simply walking away from their debts, according to the Credit Card Holders Association of India, which advocates for consumer protection.

Biyani has said that he expects Future Money's default rate to be about 6 percent, less than the 10 percent national average in India. (The U.S. rate is about 4 percent.)

His efforts will give consumers a new way to approach day-to-day shopping. "He's really going to ride this wave and make it happen," said Roldan. "And in the process, he'll help create a bigger middle class."