Mumbai: An aggressive customer acquisition drive has taken its toll on India’s second largest credit card issuer, SBI Cards and Payment Services Ltd (SBI Cards), with defaults rising to possibly the highest in the industry.
The company is a joint venture between the country’s largest lender State Bank of India (SBI) and GE Money, the Indian subsidiary of General Electric Co., a conglomerate that is also the world’s leading consumer finance firm with more than $200 billion (Rs8 trillion) worth of assets and 130 million customers.
SBI Cards, which has so far issued about 3.5 million credit cards, has posted a net loss of Rs186.61 crore in the quarter ended December 2007, its first since 2003, wiping out a substantial portion of its net worth (equity and reserves). SBI and GE Money pumped in Rs200 crore of capital into the company in the quarter.
What should worry the credit card firm more, however, is its rising non-performing assets (NPAs). As on 31 December 2007, its NPAs stood at 16.28%, possibly the highest among all credit card issuers in India. This means 16.28% of the total outstandings of customers could not be collected by the company.
More than 28 million credit cards are in use in the country. ICICI Bank Ltd, the largest private sector lender, has issued the maximum number of cards, close to nine million. Citibank comes a close third to SBI Cards, having issued 3.4 million cards. Other large players in the business are HDFC Bank Ltd (more than 2.5 million), HSBC and Standard Chartered Bank (about two million each). Barclays Plc., the newest entrant in this segment, has issued around 500,000 cards in the past one year.
Om Prakash Bhatt, chairman of State Bank of India. As a fallout of the loss and defaults, the top management of SBI Cards is being recast and Roopam Asthana, CEO of the firm, is on his way out
None of the banks reveals NPA figures for its credit card business but analysts estimate this at between 5% and 7% for most.
As a fallout of the loss and defaults, the top management of SBI Cards is being recast and Roopam Asthana, chief executive officer of the company, is on his way out. Asthana, the former head of the card division of HSBC, took over this assignment in 2004.
People familiar with the development, who did not wish to be identified, said SBI chairman O.P. Bhatt, and Yoshiaki Fujimori, president, GE Money Asia, who is also on the board of SBI Cards, are in the process of identifying Asthana’s successor, and that one of the deputy managing directors of the bank will be made the chief executive.
SBI also plans to play a more active role in running the company amid speculation that all is not well between the two partners.
Bhatt confirmed that SBI Cards has made a net loss in the quarter ending December, and said both the bank and GE Money have recapitalized the company. He denied that there is any rift between the two partners.
In an email response, Archana Handa, vice-president, corporate communications, GE Money, said: “SBI Cards continues to be the No. 2 credit card player in India, despite the tough market environment for consumer finance. In our efforts to continue being a leading player and face the industry challenges in the coming year, some of our strategic initiatives include launching innovative new products to meet the needs of different customer segments, increasing penetration in the SBI customer base, and further enhancing the customer experience of every SBI credit card holder.”
An executive in the banking business, who is familiar with the development but does not wish to be identified, said the company chased new customers and is now “paying for it”.
“Till recently, SBI Card was adding around 25,000-30,000 new cards a month, but a mandate was given to the top management to raise this level to 100,000. As a result of this, the company compromised on the quality of due diligence. The loans that have turned sticky are so small that it’s not worth filing legal cases against the borrowers as the cost of fighting such cases will be more than the money involved,” said the source.
This aggressiveness in customer acquisition is evident from the fact that the company, which took four years to issue a million credit cards, took only three years for the next million, and only one for the third million.
SBI and GE joined hands in 1998 to float two firms for the credit card business. SBI holds 60% stake in SBI Cards, the credit card marketing joint venture, and GE Consumer (Mauritius) Investment I Ltd 40%. In the processing joint venture, GE Capital Business Process Management Services Pvt. Ltd, GE Consumer (Mauritius) Investment I Ltd holds the majority 60% stake and SBI, 40%.
SBI Cards started its operations in 1998-99, made its first net profit in 2003, and continued to do so until 2007 when it recorded a profit of Rs58.76 crore. As on 31 March 2007, it had a paid up capital of Rs250 crore and reserves and surplus of Rs111 crore.
Apart from silver, gold, classic (international) and platinum cards, SBI Cards also offers at least eight co-branded cards such as Hero Honda SBI Card, SBI Railway Card, LG SBI Card, SBI Vishal Mega Mart Card, SBI Lifestyle Card, SBI Social Card, GoAir SBI Credit Card and SpiceJet SBI Card.
In August 2007, SBI Cards entered the premium card segment by launching SBI Platinum Card in association with Visa International. Around the same time, it announced that it would expand its presence to 150 cities by March 2008 from 110 cities. It is not known whether it has covered 150 cities already or slowed down in its expansion plan in view of the loss and rising NPAs.
According to data from the Reserve Bank of India, the credit card industry’s growth in India has slowed substantially, from 33% in fiscal 2007 to 18% in the first three quarters of 2008. And growth in card spends has come down from 22% to 18%.
Personal consumption through credit cards is one of the lowest at about 1% in India, compared with the global average of 8.6%, Asia Pacific’s 6 % and China’s 3%.
Rising NPAs in its cards business is not a good news for GE Money, which has been on the lookout for a strategic partner. It has already invited bids for a stake in its personal loan and mortgage business and people familiar with the development say the entire process of evaluation and stake sale may take a few months.
Handa of GE Money said the company is seeking a strategic partner for its wholly-owned personal loans and mortgage portfolios and SBI Cards and the Wizard Home Loan product will remain unaffected. Wizard Home Loan is a joint venture of GE with Wizard International, floated in September 2007.
“GE Money will continue to build on our successful partnership in SBI Card and invest in our fast-growing Wizard Home Loans joint venture,” Handa said.
“In our quest for a strategic partner for the wholly-owned personal loans and mortgage portfolios only, we continue to review expressions of interest received from all parties and have no further details to share at this time on the likely partnership,” she added.