PARIS -- Competition among French financial institutions is heating up and could lead to a nasty squeeze on consumer lending margins, especially at specialized finance companies.
Societe Generale and Credit Lyonnais, two of the biggest French banks, followed the lead of three smaller Paris lenders this week by cutting the minimum rate on loans for consumer goods to 9% from 11% or more.
Misleading Advertising Charged
Andre Wormser, chief executive officer of the consumer credit company Sovac, said the lower rates were being advertised in a misleading fashion.
Cetelem manager Paul Defourny said his company had already cut rates by two points in May, to between 10% and 14.5%.
He also criticized the publicity over the rate cuts.
"What we fear is the negative image on the whole industry," he said.
One senior banker said the cuts may have been encouraged by the government, which lays much of the blame for the slow economy on lackluster spending.
The government expects consumer spending to rise by just 0.6% this year.
Analysts said the specialist lenders will suffer most if the market-share battle escalates into a price war and official interest rates do not fall quickly.
"The big banks could probably afford to absorb the loss of the margin," said Kleinwort Benson analyst Keith Baird.
Higher Cost of Funds
Specialist lenders have to tap the money market for their lending, which costs them as much as 7.5%.
Banks, on the other hand, can rely on client deposits for funding, and they have the added security of knowing their borrowers.
However, Mr. Defourny of Cetelem said that when official interest rates drop, specialist lenders' costs will fall below those of the banks, which have the constant cost of managing client accounts.