On the cards: more stringent norms

This is one business where sellers are not vying with each other for market but for quality customers. Banks in India are not interested in robust numbers for credit cards, not any more.  They now want to consolidate their customer base, while augmenting revenue from within the existing customers by increasing their card-spends first — rather than scouting for newer ones. Simply put, banks want to rid their books of ‘bad loans’ accruing from the credit card business. Gone are the days when banks used to actively solicit new credit card customers and at times even by sending cards unsolicited.

Of course, banks do have an appetite for new card holders, but not at the expense of NPAs (non-performing assets). They have gone for aggressive clean-up operation on credit card portfolios resulting in a positive impact with issuers returning to the growth path. Here is the proof: the latest Reserve Bank of India (RBI) data shows the number of new cards issued in April this year was a million higher than the inactive and loss-making accounts culled.

 After falling for 18 straight months, the number of credit cards in circulation rose marginally from 18.28 million to 19.29 million in April.  This spur follows a financial year in which 6.4 million cards were removed from the system, according to RBI data. India’s credit card population fell to 18.28 million at the end of March 2010 from a peak of 28.31 million in April 2008, showing shrinkage of 10 million, RBI said. Cumulatively, 10 million cards have gone out of circulation in the last two years and for the first time since August 2006 that the credit card population has plunged below the 20-million mark.

 RBI data also points out that in the last fiscal, as many as 6.04 million cards were put out of circulation, which is in addition to 3.61 million credit cards being cancelled in 2008-09. The country’s second largest lender ICICI Bank, for example, has drastically cut its credit card base from a peak of more than eight million to about five million at present. It was the most aggressive bank in credit card business and was also saddled with highest amount of bad loans. HDFC Bank was ranked second in cancelletion with 4.5 million, followed by Citibank which scaled down its number of cards to 2.5 million by the end-December 2009 from 3.8 million in the beginning of the year. Other major card issuers like SBI, HSBC and Standard Chartered Bank are also going the same way, while new entrants into the credit card segment such as Barclays Bank and Axis Bank were also affected.  

Sleeping customers

A key reason for shrinkage of the credit card portfolio, according to  Sandeep Bhalla, business manager – cards for Citibank India, is that large number of dormant cards have been cancelled in the past year.  “Another reason for the dip in the credit card base is the high level of delinquencies in the industry. However, the base has stabilised as the delinquencies have slowed down (due to various initiatives of issuers),” Bhalla added.  
Informally, however, bankers attribute the declining numbers in credit card (CC) business to increased interest rates on card outstanding. Issuers have been charging higher interest rates – ranging from 1.5 to 4 percent per month that effectively works out to 18 to 48 per cent a year.  The credit card head of a foreign bank points out that the “non-performing loans or NPAs in the credit card business peaked in the fourth quarter of 2009.  It has come down from the high of 18-20 per cent to 13 per cent.”   

In terms of definition, dues that have not been paid for at least 90 days are deemed or designated as NPAs.  With the issuers’ focus switching from augmenting the card base to increasing spends by card-holders, banks in the name of consolidation are going slow on credit card issuance. No wonder, you are no longer being chased at ATM terminals and at petrol pumps by DMA (direct marketing agency) guys with forms to enroll you as credit card member offering all kind of lollies – from bonus points for leveraging at merchant establishments to exclusive luxury lounge for specific card holders at most airports.   

At the same time, the demand for credit cards are also increasing in spite of increased interest rate on card outstanding balances, which interestingly has not proved any dampener for people to opt for the credit card. Points out RBI’s Chief General Manager – Customer Services Department Kaza Sudhakar: “Merely because, most people (80 per cent of them) don’t pay any (interest) charges as they use the credit period (of up to 45 days) smartly, avoiding interest.”  transaction management company Venture Infotek MD Piyush Khaitan says: “….(some) banks are going slow on credit card issuance and have been promoting spends through risk-free debit cards by offering various incentives to consumers such as loyalty rewards, discounts by select retailers and cash-back options.”   
Not making money

It is increasingly becoming difficult to get a credit card these days.  “Earlier customers used to complain that they were bombarded with cards, now they (consumers) want one but are not getting it – at least not easily,” says RBI’s Sudhakar. Industry observers also maintain that some banks have suffered huge delinquencies in 2005 to 2007 (supposedly the boom years).  As they are not making enough money (significantly) on credit cards, some are not promoting credit cards actively like they used to do earlier, while some have changed their tack.  

For instance, SBI which runs its credit card venture jointly with GE Capital Services, the largest issuer of private label credit card in the world, maintains that issuers are becoming stricter with credit information of individuals being validated by specialised agencies. SBI Card has at least 2.5 million customers. Banks now are using services of entities like Credit Information Bureau India Ltd (Cibil), which collates the credit history of individuals and assigns credit scores, which comes in handy to asses the credit worthiness of a prospective customer.

HDFC is cleaning its credit card book by closing down dormant cards, while at the same time pitching for about 80,000 new card customers every month.  “Of these, the bank sources 85-90 per cent of the credit card business from existing bank customers, while the remainder comes from the open market generated by direct sales agents,” says HDFC bank credit cards head Parag Rao. Stricter due dilligence is part of the steps in the right direction and a process of maturing for the card industry in the country, he added.

Global shock

Following the 2008 recession and the subsequent continuing slow down, defaulting on credit card payments became rampant, though not many people defaulted on their home-loans or car-loans. This is because there is no mortgage in credit card loans while home and car loans are backed by the value of the mortgaged assets that lenders can take possession to recover money lent.

Banks have now changed the strategy by enticing people to spend more suing their cards. Accordingly, Standard Chartered Bank has seen its monthly credit card spending rise from Rs 250 crore last year to Rs 400 crore this year. “We are aiming for a target of Rs 500 crore per month soon. Ours is a highly rewards-driven programme, with focus on what works with customers,” says StanChart retail banking general manager Shyamala Saxena.

In macro perspective too, as is evident from RBI data, customers spent an average of Rs 2,686 per transaction in 2009-10, up from an average spent of Rs 2,540 per swipein 2007-08. Even though the number of credit cards in circulation has gone down, the spending has increased. This implies that banks are successful in retaining quality customers and making them spend more.