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All You Need to Know About the Indian Credit Card Market

Aug 25, 2021 3:45 AM 5 min read

India’s credit card market has been in a state of constant flux of late.

On Wednesday, the RBI lifted a ban on HDFC Bank that restricted it from issuing new credit cards (a development that, some analysts opine, might trigger a 32% rally in the lender’s stock). This ban, which was instituted last December (why?), has since caused the lender to lose a market share of c. 180 bps, with its card base falling from 15.38 million in December to 14.82 million in June. Meanwhile, rivals ICICI Bank, Axis Bank and SBI Cards have capitalised on HDFC's losses.

And last month, the Central Bank barred Mastercard indefinitely from onboarding any new customers from July 22nd (why?). This is expected to unleash a significant upheaval in the payment processing market, which might be headed for a “monopoly” under Visa. (Yes, RuPay is a major competitor too, but GoI’s zero-MDR rule for RuPay debit cards means private lenders may largely opt for Visa in the absence of Mastercard.)

Besides being consequential, these developments also shine the spotlight on India's small-but-burgeoning credit card market.

The Indian Credit Card Market for Dummies

Payment cards, as we all know, are broadly of two types - debit and credit. The latter kind of cards are for the more debt-friendly consumers.

Now, the Indian card-payment market is overwhelmingly debt-conscious. As of February 2019, at 944.5 million, debit cards were 95.3% of all operational cards (with 46.1 million credit cards in operation). Similarly, credit card loans also constitute a minuscule part of overall loans (a little more than 1% of the total loan amount disbursed in FY19). A vast portion of the Indian population also continues to be unserved (or underserved) by the formal credit market. Case in point: household credit utilisation as a % of GDP in India in 2019 was 11% vis-a-vis over 75% in developed economies (USA/UK) or over 30% in other countries such as South Africa, China and Japan.

For comparison, at 1.5 billion, 67% of operational cards in the US are credit cards. And credit card spends in India as a % of GDP stood at 3% (2017), significantly lower than in other countries such as the US (17%), Hong Kong (25%) and Brazil (12%).


Waiting to Come of Age

Clearly, the credit card market is woefully underpenetrated. However, the accelerating tide of digitisation - boosted by favourable Government policies, growing digital literacy, the rising popularity of e-commerce, and the increasing availability of POS infrastructure - is putting the wind in the credit card market’s sails. This is all in addition to a wider shift in the mindset of consumers from being savings-focused to embracing consumption and instant gratification.

The IPO of SBI Cards - the country’s second-largest credit card issuer after HDFC Bank - last year was viewed as a watershed moment for the industry. While the company witnessed a rather weak stock market debut with shares ending at a 10% discount vis-a-vis the issue price of ₹755 ($10.18) (it is currently trading c. +33% above the issue price), the market itself has been enjoying healthy growth rates in recent years.

Credit card spends grew at a CAGR of 32% between FY15 and FY19, with overall spends expected to touch ₹15Lcr ($202.33bn) by FY24. This mirrors the growing popularity of the wider digital payments industry, which, according to CRISIL, is expected to more than double in transaction value to ₹4,055Lcr ($5.47trn) by FY24 (five-year CAGR of 20%).

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Two is a Crowd

Coming back to the two big developments we discussed earlier… They are bound to chart the course of the credit card market in the near-term.

Let’s begin with the HDFC saga. According to its own investor report, 95% of all transactions by India’s largest private lender by assets are conducted through internet or mobile channels. The total number of HDFC credit and debit cards in circulation are 14.9 million and 33.8 million respectively.

The RBI’s ban on card-issuance was obviously bad news for the bank. But it can expect sunny days ahead. It may soon be able to regain its lost market share with a slew of attractive credit card schemes. There’s a large market to which it can cross-sell, to say nothing of the ocean that is the Indian consumer segment sans credit cards. And let’s not forget that the country is entering a long festive season, which can be lucrative for the lender.

On the other hand, Mastercard’s prospects appear less sanguine. There’s no telling when the restrictions placed on it may be lifted. In the meantime, Visa will rule the roost. (RuPay’s presence in the credit card segment is anyway relatively muted.)

The impact on banks is a different story. You see, most Indian banks work with more than one card network. Some, however, partner with only one network for specific co-branded cards. Meaning, entire card schemes of some lenders were reliant on Mastercard's infrastructure pre-ban. RBL Bank, Yes Bank and Bajaj Finserv, for instance, had a whopping 100% of their credit cards based on Mastercard. However, these lenders moved quickly to limit impact by inking deals with other providers (read: Visa). 


The Road Ahead

Going forward, the market seems poised for consistent and strong growth.

For starters, the COVID-19 pandemic has reinforced the popularity of digital payments, whilst aiding its spread and adoption in non-tier-1 cities and towns.

Secondly, India is an overwhelmingly young nation, and younger consumers - especially Millennials - are typically less credit-conscious. Also, India’s consumer internet spend is expected to grow at 25% CAGR from 2022 to 2026 after a 42% jump in 2022. This spend typically includes online retail of mobile, electronics, fashion, grocery, food tech, bill payments etc.

Thirdly, the ongoing economic doldrums notwithstanding, the economy is expected to enjoy steady growth in the medium-term. This will be accompanied by growing income levels, which naturally increases consumer appetite for discretionary spending. India’s GDP growth is expected to be driven meaningfully by an escalating private final consumption expenditure, which as such bodes well for credit growth at the retail level. 

Fourthly, India’s embrace of the digital payments ecosystem seems relentless. However, this includes the growing popularity of payment systems such as mobile payments and UPI, whose growth might happen at the expense of the cards sector.

Nonetheless, the predicted robust growth of the credit card market bodes well for the economy. The pandemic, the dip in growth, and unemployment will no doubt hurt the market’s prospects in the near-term. Which is why its growth will be intricately linked to the performance of the broader economy as a whole.


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