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Home / Industry / Banking /  The losing steam of India's credit card market

The losing steam of India's credit card market

During the pandemic, credit card companies tightened their policies and stayed away from certain categories of borrowers such as the self-employed, considering them riskier than others. 

  • The pandemic and new options before consumers have left India’s credit card market at a crossroads
  • ‘Buy now, pay later’ companies, the latest to enter the credit business, are luring card customers away. BNPL has quickly grown to a market size of 36,300 crore in India.

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Chinmaya Mishra, a pharma executive from Bengaluru, prefers to use the Buy Now, Pay Later (BNPL) facility on ecommerce sites for small transactions. The 39-year-old says he meticulously tracks all his BNPL purchases in a notebook and ensures that he lives within his budget.

Chinmaya Mishra, a pharma executive from Bengaluru, prefers to use the Buy Now, Pay Later (BNPL) facility on ecommerce sites for small transactions. The 39-year-old says he meticulously tracks all his BNPL purchases in a notebook and ensures that he lives within his budget.

Sreekanth Reddy, 34, who is also from Bengaluru, uses pay-later products as he likes the convenience and plethora of offers bundled with them. Like Mishra, the software engineer prefers to use the BNPL option for small purchases and has been doing so for five years.

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Sreekanth Reddy, 34, who is also from Bengaluru, uses pay-later products as he likes the convenience and plethora of offers bundled with them. Like Mishra, the software engineer prefers to use the BNPL option for small purchases and has been doing so for five years.

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They may have been bitten by the BNPL bug, but Mishra and Reddy still use credit cards. Mishra has been using them for over 10 years now, while Reddy still prefers to use his premium credit cards for large-value purchases. Indeed, banks and industry experts firmly believe that BNPL will not replace credit cards. But it would be fair to say that BNPL is the biggest competitor credit card issuers face today in terms of potential. In fact, the credit card business as a whole is at a crossroads today.

In part, this is because the dynamics of the credit card market have changed in the wake of the pandemic, with growth in card issuances lagging the pre-pandemic period for a majority of lenders. Issuance of new credit cards was impacted in FY21 as several of the largest card issuing banks took a step back to assess the situation, prioritising asset quality over aggressive growth. Data compiled by Motilal Oswal Financial Services showed that outstanding credit cards grew 7.5% in FY21, as against a steady growth rate of 23-26% over the previous three years. This was on account of stressed customers being unable to repay, turning non-performing and eventually dropping out from the books of card companies.


The pandemic also hit credit card spends. In 2020-21, aggregate spends contracted 14%, against annual growth of 21-40% over the previous three years. However, spends bounced back in 2021-22, growing 54%, albeit on a smaller base.

“From a pandemic perspective, there has been stress on a part of the portfolio and some issuers have had to take a hit. These customers have either gone out of the system or now do only limited transactions and repay the entire payable amount," says Mihir Gandhi, partner and payments transformation leader, PwC India.

Indeed, some consumers who managed to emerge from the financial stress induced by covid are now wary of using credit cards. Lockdowns, cash flow disruptions and uncertainty during the pandemic had forced a majority of these borrowers to seek a recast of their dues.

“Only a few of them (recast borrowers) are actually interested in again using their cards; the bulk of them have been very circumspect," Rama Mohan Rao Amara, chief executive of SBI Cards and Payment Services Ltd, told analysts on 29 April.

Now, with the economy opening up, credit card issuers are cautiously trying to woo those who abandoned their cards back into the fold.

Reloading revolvers

Credit card customers can be classified into two groups, based on repayment schedules. One group comprises transactors, or those who pay the outstanding amount by the due date. The other is revolvers — customers who pay only a part of their dues on the repayment date, to avoid a default. While banks have removed most of the stringent credit filters applied to their borrowers in the early months of the pandemic to allow onboarding of more customers, the segment known as revolvers is yet to make a comeback. Credit card companies earn more interest from revolvers and the drop in their numbers has hurt their earnings.

“It is taking longer than what we had expected, but it is an industry phenomenon. Everyone is looking at it and making attempts to improve the revolver (book)," says Amara.

It is estimated that revolvers accounted for 40-50% of outstanding dues before the pandemic and the covid impact has shrunk their share by 10-15 percentage points. The percentage of outstanding is skewed in favour of revolvers because such customers typically have higher outstanding balances than transactors.

Sanjeev Moghe, president and head of cards and payments at Axis Bank, believes it would take another 18-24 months of gradual increases in revolving behaviour to take the share of such customers to pre-covid levels. “We extended the moratorium to borrowers, and while some of them were able to repay after it ended, others could not. This happened over 12-15 months ago," he says.

Widening the net

Credit card companies had tightened their policies during the pandemic, attempting to shield their books from bad loans as the virus crimped people’s ability to repay debt. They also stayed away from certain categories of borrowers such as the self-employed, considering them riskier than others. They were reluctant to offer new cards to employees from certain sectors with a higher potential of job losses and even slashed the credit limits of a number of existing customers. With the situation evolving, lenders are now readjusting those limits and even raising them to nudge users to spend.

For instance, SBI Card has now gradually begun adding consumers from segments it had shunned. In fact, the bank’s sourcing of new customers from the self-employed category increased by two percentage points between December 2021 and March 2022, indicating its willingness to let go of covid-era measures.

SBI Card faced the nightmare of surging bad loans during the first phase of covid-19. India’s second-largest credit card issuer saw its asset quality deteriorate in the three months through September 2020 as gross non-performing assets (NPA) rose to 4.29% of its total outstanding, from 1.35% in the June 2020 quarter. The company has been able to curb such dud assets and reined in the gross NPA ratio to 2.22% as on 31 March 2022.

Limited clientele

Credit cards originated in the US during the 1920s, when individual firms such as oil companies and hotel chains began issuing them to customers for purchases made at company outlets, according to the Encyclopaedia Britannica. The first universal credit card, which could be used at a variety of establishments, was introduced by Diners Club in 1950.

A public sector bank was the first to introduce credit cards in India. Central Bank of India, the only bank still under the RBI’s prompt corrective action framework, launched its credit card in 1980. In 2019, Central Bank discontinued issuance of credit cards and partnered SBI Card to issue co-branded credit cards to its customers.

While credit cards have been in India for over four decades, they were initially accessible only to a select group of wealthy individuals, and in later years, to the salaried middle class. Today, the country has about 75 million cards, with HDFC Bank, SBI Card (subsidiary of State Bank of India), ICICI Bank and Axis Bank being the leading issuers. However, only about 35 million people have access to credit cards, considering an average user has two cards.

Although India has seen digital payments flourishing through the homegrown unified payments interface (UPI) channel, use of credit cards is still largely limited to tier 1 and tier 2 cities and towns.

In an economy driven by consumption, credit cards serve as the perfect vehicle for spending. Although card issuance has shaken off its pandemic-driven inertia, experts believe the sector has significant untapped opportunities. The market, they say, is under-penetrated.

Hitting reset

Now, a clutch of new entrants wants to democratise access to credit products. They are taking fresh bets on the business, armed with advanced analytics capabilities and the power to underwrite customers based on analysis of big data. Not only are smaller banks and freshly-funded fintechs joining the bandwagon, existing card players are also resuscitating their portfolios to capture the aspirations of the nation’s millennial population.

For instance, BoB Financial Solutions (the erstwhile BoB Cards Ltd) introduced credit cards in 1994, four years ahead of India’s largest bank SBI, but has lagged its peers in terms of issuance. Shailendra Singh, managing director and chief executive of BoB Financial Solutions, had told Mint last November that the company had to hit the pause button after facing massive defaults in the early years. It was only in 2018 that the initiative was revived. The company has now issued over 1 million cards which, while giving it a minuscule market share of 1.5%, signals its intent to grow.

Then there is Federal Bank, which has just entered the space. Having launched credit cards last September, the Kochi-headquartered private lender currently issues pre-approved credit cards to existing customers and is preparing to soon source customers from the open market.

“Subsequent to covid-related restrictions being eased, spending on shopping, food, beverages and travel-related segments is showing good traction," says Chitrabhanu KG, senior vice-president and country head for retail assets and cards, Federal Bank. However, like its peers, the bank believes that the build-up of revolvers is expected to gradually increase over the next four to five quarters as the newly issued card portfolio matures.

Chitrabhanu believes that the resurgence of the economy and general mood of optimism visible in the market will prompt such customers to restart using cards, particularly during the upcoming festival season.

A recent RBI circular, allowing non-banking lenders to offer credit cards without a banking partner, has also created a stir. Until now, NBFCs had been barred from entering the business sans a banking partner. The move is expected to lead to a flurry of non-banking entities that meet the regulator’s application criteria queuing up for credit card licences.

Meanwhile, Axis Bank, which issued 2.67 million credit cards in FY22, announced in March that it would buy Citibank’s consumer business in India for 12,325 crore ($1.6 billion) in cash. This includes the credit cards, retail banking, and wealth management divisions of the foreign bank. While the bank should benefit from the addition of high-spending Citi customers, the portfolio has been witnessing attrition since the lender announced its plans to exit India, in April last year.

BNPL challenge

BNPL companies, the latest to enter the credit business, could also lure card companies’ customers away. BNPL, estimated to have a market size of 36,300 crore in India, aims to bring easy access to credit to customers who do not have a history of using credit products. The industry is convinced that BNPL will build a repayment history for new borrowers that can be used by other lenders in future. It thus creates a funnel for banks and non-banks to tap into a fresh customer base and sell smaller loan products such as personal loans.

Primarily, there are two models used by BNPL companies in India: split payments, where repayments are scheduled over three months at no interest; and instalment loans, used for larger purchases. A PwC analysis from March expects the BNPL market to reach 3.19 trillion by the end of 2025–26. BNPL companies make money from merchants or sellers as well as from consumers. Companies that offer interest-free repayments charge a late fee on overdues. Those that offer big-ticket pay-later schemes, often charge interest. Meanwhile, merchants pay a fee on each transaction.

“We used to see disproportionate contribution from tier 1 and 2 cities but it is going deep now and seeing adoption across geographies. The demand is primarily from young, digitally-savvy customers, less than 30 years old, who are looking for convenience," says Anup Agarwal, business head of BNPL company LazyPay.

Agarwal says that the reason there is a growing demand for BNPL products in smaller towns is that they have not been served very well across lending products, especially by credit card companies. Credit card issuance has not kept pace with the expansion of e-commerce in smaller towns across India.

However, the BNPL trend is not without risk. Experts are circumspect about the product and the ability of BNPL lenders to recover dues on time. While it is easy to give a loan, it is quite difficult to recover it, and therefore collection efficiency remains one of the primary concerns. Melbourne-headquartered BNPL lender Afterpay, one of the largest lenders of its kind, suffered large losses and was eventually taken over by American financial services firm Block Inc in January. The Sydney Morning Herald reported on 12 April that Afterpay posted a net loss of $345.5 million for the six months to 31 December, a jump from the $79.2 million loss it reported in the prior corresponding half.

Citing this example, experts say that BNPL lenders need to adopt a cautious approach on what will work in the Indian context. Just because a model has worked globally does not necessarily mean it will work here, too. Thus, credit cards are here to stay and experts believe it is an aspirational product that most consumers find appealing.

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