Banks willing to take on more risks on credit cards as usage picks up

India’s lenders, most of whom have remained reluctant to grow their credit card portfolios rapidly, are now willing to take on more risks as credit card usage picks up, making it a lucrative business.

As on 31 March, outstanding credit card loans rose 22.6% to Rs.30,500 crore from a year earlier, according to the Reserve Bank of India’s (RBI’s) sectoral credit data, making it one of the fastest growing segments. The increase has been partly driven by the growing popularity of e-commerce.

The potential for increased usage of credit cards along with improved credit information data is pushing some banks to grow their credit card portfolios more aggressively. Following a surge in defaults on their credit card portfolios in 2008-09, most banks had turned cautious on the segment.

The number of credit cards issued as of 31 December stood at a little more than 20 million, according to RBI data, up 13.6% from 17.6 million as of 31 December 2011.

This period of slow growth may be coming to an end now, say bankers, who are willing to expand their credit card base more rapidly.

Private-sector lender HDFC Bank Ltd will use a digital strategy to grow its credit card user base further, Parag Rao, senior executive vice-president, business head for card payments and merchant banking business, said in an emailed response on Friday.

The bank will provide a paperless application and quick processing services, he said, adding that, presently, about 20% of the monthly card sourcing is done through digital channels.

According to RBI’s data, HDFC Bank had the largest credit card base, with nearly 5.75 million outstanding cards as of 31 December. HDFC Bank has been adding 150,000 cards to its portfolio each month and has a 30% market share, Rao said.

The bank, however, has preferred to stay within its existing customer base.

SBI Cards and Payments Services Pvt. Ltd, which had a credit card base of 3 million as of 31 December 2014, will use direct selling strategies to customers within and outside the bank to grow its cards business, said Vijay Jasuja, chief executive officer, SBI Cards—a subsidiary of State Bank of India.

The country’s largest bank will also be looking at more co-branded credit cards over the next year by associating with retail brands and other banks, Jasuja added.

State-run Bank of Baroda also plans to expand its cards business.

“Currently, we have almost 100,000 credit cards and we want it to become 200,000 soon. We are losing high-value customers to private sector banks because we do not have a credit card offering for them,” Ranjan Dhawan, managing director and chief executive officer, Bank of Baroda, said on the sidelines of the bank’s fourth-quarter earnings press conference on Monday.

Not everyone is convinced that the increased risk is worth taking. Some bankers feel that issuing cards to customers who hold accounts in the bank remains the safer option.

“Credit cards are the riskiest retail product that banks can offer, so they will obviously be very cautious. In our experience, customers with the bank are much safer now,” said Jairam Sridharan, president and head of retail lending and payments, Axis Bank Ltd.

As of 31 December 2014, Axis Bank had a credit card base of nearly 1.6 million users, the RBI data showed.

“While credit bureau data is important, information like steadiness of income, information whether the customer has been issuing bad cheques can only be tracked accurately through a working savings bank relationship,” Sridharan said.

Analysts point out that the higher credit costs that banks incurred on account of errant borrowers in the past and the expenditure on unused cards had resulted in significant losses on the credit card portfolio. This had made bankers selective about the customers they offer cards to.

“Till the time that they see some business sense in growing their card base, banks will not be aggressive. For banks to see business sense, there needs to be a drastic structural change in the way our economy functions. People’s dependence on cash would need to come down and more people would need to be employed by the organized sector,” said Vibha Batra, senior vice-president and head of financial sector ratings at ratings agency Icra Ltd.

Nearly three-and-a-half decades after the first card was launched, there are 30 lending institutions with credit card portfolios in India, but the penetration of credit cards stands at less than 2% of the population.