Mumbai: India’s credit card base has shrunk by 10 million cards to 18.31 million at the end of March 2010 from 28.31 million at the end of March 2008 as banks seek to rid their books of bad loans accruing from the business.

Lowering exposure: Credit card base in the country fell to 18.3 million at the end of March as banks seek to rid their books of bad loans. Ramesh Pathania/Mint

Bankers attribute the reduction to increased interest rates on card outstandings, apart from those that have been cancelled and are inactive. Banks have, meanwhile, stopped soliciting business from the open market.

“The irrational lending in the Indian unsecured market has corrected. The market has now become stable as banks strike a balance between profitability and growth," said Saurabh Tripathi, partner and director of Boston Consulting Group. “We will continue to see a drop in card numbers as banks become selective in sourcing customers. However, the spends will continue to rise as customers now pay an annual fee to hold a card and banks (are) also coming up with more value-based promotions."

In the past year, a large number of dormant cards have been cancelled, a key reason for the shrinkage of the portfolio, said Sandeep Bhalla, business manager, cards, Citibank India. “However, spends on cards have increased around 2-3% during the same time," he added. “Another reason for the dip in the number of credit card customers is the high level of delinquencies in the industry. However, the customer base in the industry has stabilized as the industry delinquencies have slowed down."

The credit card head of a foreign bank said on condition of anonymity, “Non-performing loans, or NPAs, for the banking industry in the credit card business peaked in the fourth quarter of 2009. The NPAs have come down from the high of 18-20% to the low teens." Dues that haven’t been paid for at least 90 days are designated as NPAs.

ICICI Bank Ltd, the largest credit card issuer in the country, has brought down the number of its cards to about five million from 8.5 million and stopped taking on fresh customers.

HDFC Bank Ltd is ranked second with 4.5 million cards. In January 2009, Citibank’s card base was at 3.8 million, which was scaled down to 2.5 million by the end of December. Currently, it has at least two million card subscribers.

“We are sourcing around 80,000 new card customers every month. The bank sources 85-90% of its business from bank customers. The rest comes from the open market generated by direct sales agents," said Parag Rao, head, product, portfolio and service delivery, credit cards, HDFC Bank. “The delinquent cards ratio has gone up in the past one year and banks have closed those accounts. Banks have also been cleaning their credit card book in the past one-and-a-half years by closing down dormant cards."

State Bank of India (SBI), which runs its credit card venture jointly with GE Capital Services, the largest issuer of private label credit cards in the world, said issuers are becoming more strict.

“At SBI Card, we have always believed in stringent credit assessment and underwriting," said the spokesperson of SBI Cards and Payment Services Pvt. Ltd. “We now have more stringent credit checks with credit information bureaus/agencies including Credit Information Bureau (India) Ltd (Cibil)."

Cibil collates the credit history of individuals and assigns credit scores, which banks use before they sanction a loan or credit card.

“This short-term correction in the credit card base is a step in the right direction over the long term. It is part of the process of maturing for the industry in India," added the SBI spokesperson. SBI Card has at least 2.5 million customers.

The average monthly spending on cards across the country is between Rs2,200 and Rs2,400, but only around 40% of users roll over credit. Banks do not earn any interest if customers clear their dues within the due date.

According to the Reserve Bank of India data, the amount outstanding on credit cards increased to Rs6,722.59 crore at the end of March 2010 from Rs4946.34 crore at the end of March 2009.

Card cancellations, typically driven by both defaults on payments and non-usage, are at around 8-12% of the total card base. Banks block a card if payment is not made within 30 days and cancel it if no payment is made for 90 days.

“In the past one year, card companies’, including Citibank’s, focus has narrowed to the top 10-12 cities when it comes to sourcing credit cards as the usage is higher in these centres," Bhalla said.