The advent of credit cards, popularly known as plastic money, has enabled access to easy money to the card holder. The huge demand for this form of credit has resulted in sharp spike in the number of credit cards in circulation. Financial institutions, including banks, have started increasing their exposure to this high-risk high-return business to tap the rising demand.
While the system credit card loan book has increased at a compounded annual growth rate (CAGR) of 44%, its percentage to total system loan book remains low at 1.08%.
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Though financial institutions reduced their exposure to credit cards during the recent downturn, they are likely to tap increasing demand as the economy revives.
Large private sector banks, especially ICICI Bank Ltd, HDFC Bank Ltd and Axis Bank Ltd, were among the first few banks who entered this niche business segment. The high-yield earning business and limited intervention from the Reserve Bank of India (RBI) prompted these banks to rapidly increase their exposure to the segment. They made plastic money easily available to people even without assuring their credibility and gradually increased their market share in the total credit card business to nearly 50% by FY08. However, following the global financial crisis, these banks have been constantly reducing their credit card exposure. For instance, Axis Bank’s credit card book is down 36% year-on-year (y-o-y) (16% year-to-date, or YTD) during the first half of FY10. ICICI Bank has trimmed its book by 32% y-o-y (22% YTD) during the same period.
The credit card business is an unsecured loan with no collateral and the downturn compelled companies to reduce their exposure to this risky segment. Companies reduced their customer base by deactivating unused cards and by delaying new issuances. They also reduced credit limits for their existing customers. These steps resulted in significant decline in the number of credit outstanding. The total credit spending declined by a sharp 47% y-o-y, implying reduced use of plastic money. However, with improving economic conditions, we expect companies to revisit their strategy towards this business which is categorized as a high yield earning asset but with high risk of rising delinquencies.
There has been a significant decline in credit card volumes. From a peak of 23.8 million cards outstanding as on April 2008, the number of cards outstanding has declined to 21.1 million as on October 2009. Credit card spending, too, has declined by 23% from its peak in October 2008.
Low penetration would act as an incentive for companies that are waiting on the sidelines to enter this high-risk high-return business.
While delayed credit card payments resulted in high interest payment, a key parliamentary standing committee has recommended that all financial charges levied by credit card companies should not be left open-ended and at the discretion of the banks. It has urged RBI to regulate the credit card market more closely. While the step is in the right direction, in our view, the central bank’s intervention may discourage banks who continue to bid for a higher market share.
Graphics by Yogesh Kumar/Mint