After the initial boom period of 2004 to 2006, the Indian credit card industry had its bubble burst in 2007-09. However, it seems like the tide is turning with the sector witnessing a dramatic drop in credit card defaults in the last one year.
According to data compiled by the Credit Information Bureau of India (Cibil), financial health of average individual borrower has risen. The data shows that the proportion of borrowers with a credit score of more than 800 has gone up from around 23% in 2008 to over 62% in 2011.
Credit score is a ranking drawn up by Cibil, the largest repository of borrower information in the country, which ranges from 300 to 900, with 900 being most creditworthy.
In the last one year, the percentage of cardholders who have not met their payment obligations for more than 90 days has dropped from 2.82% in the fourth quarter of 2010 to 1.62% in Q4 2011. The significance of 90 days is that the Reserve Bank of India requires banks to classify loans that are not repaid in 90 days as non-performing assets.
This is a marked turnaround for a business which has been hit by defaults since the 2008 global financial crisis and many banks have got out of the personal loan space completely.
Besides a fall in defaults, cardholders are using their cards for a 30% higher value.
According to SBI Cards, the country's third largest issuer of credit cards, increased awareness and focus on profitable growth has paid rich dividends. "Credit card issuers are relying a lot on bureau data, which has improved dramatically. This has reduced the scope for delinquencies significantly. The irrational exuberance that we saw in 2008-09 no longer exists. Banks are adopting a more calibrated approach in growing their card portfolios," Kadambi Narahari, chief executive officer of SBI Cards told moneycontrol.com.
Also, SBI Cards is careful in enrolling new customers and selling to existing accountholders. "We charge an annual fee ranging from Rs 499 to Rs 2,999 to our customers on all our cards. This helps us weed out serious users from the non-serious ones," Narahari says.
The fact of the matter is people have realised the importance of keeping a good credit score, believes Sanjeev Jain, CEO, GE Capital Business Processes Management Services -- SBI Cards joint venture partner. "We have had customers asking us to clean their credit history of an eight-10 year old default as they were unable to avail a home or a car loan because of it," Jain says.
However, having only "good" customer means company margins come under pressure, where the real money is made on penalties.
Besides keeping an eye on who they are dealing with, card companies have also come out with customer-specific products. "For example, if a customer uses his or her card more for eating out, we give them offers related to dining out. If a customer uses the card more to book travel tickets, we offer them cards designed for frequent flyers," Narahari says.
Another hit has been the corporate cards. "Companies have found corporate cards a great way to manage cash," Jain says adding, it also cuts down on reckless spending by its executives.
Secured cards have also started to gain traction. Basically, what they do is offer customers, who otherwise are not eligible, credit cards based on their fixed deposits with State Bank of India.
"We offer up to 80% of the amount of the fixed deposit to the customers. This strategy removes any scope of delinquency in these accounts. We are also offering cards without a security in areas that we call project towns. We are issuing these cards to corporate employees working in small towns and cities provided the company has very good relationship with us," Narahari explains.
Secured cards have formed 10% of SBI cards total portfolio.
'REAL GROWTH IN TIER II & III CITIES'
Credit cards are meant for the urban population. That was the popular belief among most industry watchers and market analyst. However, that is not the case now. Products such as secured cards and aggregation of demand have led to a spike in card holders in tier II & tier III cities. Also, the thriving retail scene has also helped the demand in such cities.
"The ability to source clients, service them and recover the money holds back most issuers from offering credit cards in deeper geographies. We have expanded our portfolio in tier II and III centres in the past 12-18 months. In many of these locations we are offering credit cards against security. So, if you have a fixed deposit with SBI we will offer you a credit card," Narahari says.
In fact, the SBI Card chief expects growth in these small towns to outpace thier urban counterparts. "We are also targeting people who have just joined work. We call them the emerging segment. These are people who have the potential to become good customers in future. Hence, we want to partner them in their early life," he says.
SBI Cards, which has a base of 2.2 million cards, hopes to add 1 million new card holders by 2014-15. It is also launching a new high end signature card for HNI customers shortly.
A big trigger for SBI Cards has been the use of the short messaging service or SMS. "Every time our customer makes use of our card, he immediately gets an SMS on the transaction no matter how small it is. This gives a sense of security to the user and helps him track of his account. Mobile commerce has been a big growth driver for us," Narahari says.
Security mechanism on the cards has also been upgraded so as to prevent unauthorized transactions. The Reserve Bank of India has mandated card companies to migrate to the high security EMV platform by 2014. This is likely to drastically bring down credit card frauds.
The recent White Paper on black money tabled in the Parliament by the finance minister suggested tax incentives for encouraging use of debit and credit cards as these leave audit trails.