A detailed analysis: Indian Credit Card Market

Cards

Cards or plastic money have been very convenient for everyone and eliminated the inconvenience to carry large sums of money to buy goods. Now generally cards are of two types credit and debit. A credit card is issued by a bank that enables a person to borrow money from the bank, provided the borrower agrees to pay the money back to the bank, with interest. Whereas a debit card makes payment directly from a personal bank account, thereby eliminating the danger of racking up debt.

The Indian Credit Market

India is a highly debt-friendly market. Supporting the statement, the Reserve Bank of India said that in February 2019, the total number of debit cards grew to 944.5 million (95.3% of the total number of operational cards), adding 13.28 million new cardholders. At the same time, a total of 46.1 million credit cards were in operation, with the addition of 0.89 million cards. Between February 2018 A and February 2019, India added some 9.13 million credit cards and 89.11 million debit cards.s compared to India, the United States have about 1.5 billion active credit cards, which comes up to 67% of the total number of cards operational in the United States.

Money borrowed by a typical Indian Household is broadly classified in the following categories: Personal Loans, Educational Loans, Housing Loans, Vehicle Loans, Consumer Durables and Credit Cards.

From this graph, we can easily see that a typical Indian barely uses any sort of credit card loan. (1.05% of the total loan amount in FY2018–19).

There has been a gradual rise in the credit card loan amounts as compared to the previous years, but it still is very low. Generally, most of the loans are taken for the purchase of houses or vehicles. Now as compared to the US, the credit card debt just for the Q2 of FY19 stands at $1.08 trillion, which is 7.79% of the total loan amount of $13.86 trillion. For every 100 people in India, there are only 3 credit cards. A comparable penetration figure for the US is 320.

To get a further understanding of how low debt India has, currently the countries with the highest GDP are United States (21.41 trillion), China (15.54 trillion), Japan (5.36 trillion), Germany (4.42 trillion), India (3.16 trillion), France (3.06 trillion), United Kingdom (3.02 trillion), Italy (2.26 trillion), Brazil (2.26 trillion), Canada (1.91 trillion). Of these countries, India has the lowest average debt/GDP ratio for the past 3 years(11.6%). The country immediately above India is Brazil, which has an average ratio of 28.3%. A lower debt/GDP means that the country is producing enough to pay off their debts. Thus banks would be willing to give bigger loans if you make more money. This tells us how much scope, there is for the Indian Credit Market to rise.

Why do Americans prefer Credit?

It is quite natural for us to think why do people in the US spend more on credit cards? First, it is simply easier to do. Let’s say you have Rs.3,000 budgeted for a romantic dinner with your significant other. If you only have the Rs.3,000 in cash, you will pay careful attention to what you are ordering to make sure you have enough to pay for your meal and tip. However, if you have a credit card, there is no immediate penalty for over-spending, so it’s easier to go over your budget! Another reason is a phenomenon called coupling. When someone buys an item with cash, they immediately know how much that item costs, which can be painful. However, when someone pays with a credit card, there is a period between when they purchase the item and when they have to pay for it, which makes the cost seem less important.

Another major reason which most of the people in India do not know is that credit cards are much safer as compared to debit cards. With technology advancing every day, hackers can access your entire bank details when you swipe your debit card, but with credit cards, they cannot do that, as it does not have direct access to your account!

Apart from this, Credit card users can reap cash, discounts, travel points, and many other perks unavailable to debit cardholders by using rewards cards. Consumers who pay off their cards in full and on time every month can profit substantially by running their monthly purchases and bills through rewards cards.

Here is an insight into the Indian thinking that has made India a debit-friendly market. Firstly, every bank account issues a debit card automatically to the account holder. Many customers, especially those new to this digital ecosystem, do not want to handle multiple cards and just prefer sticking to one that their bank has issued to them, which is the debit card. Moreover, we Indians have been culturally conservative about excessive spending, and it has been infused in our mindset that one should spend well within one’s means and so we try to save every odd penny.

SBI Cards IPO

Statistics like those mentioned above suggest that India’s first initial public offering of a credit card issuer might be an opportunity with boundless prospects. On the 28th of November, 2019, SBI Cards filled for an IPO with SEBI (Securities and Exchange Board of India). The IPO is valued at around Rs. 9,600 Crores ($1.3 Billion), making it the biggest IPO of the current financial year.

SBI Cards and Payments is a private banking company that provides payment solutions in India. It was launched in October 1998, as a subsidiary of The State Bank of India, India’s largest Commercial Bank in terms of deposits, advances and the number of branches. SBI Cards is the countries second largest Credit Card issuer (leader being HDFC Bank), with a market share of 18% of the total credit cards as of September 2019. The company’s total income increased at a CAGR of 44.9% and the revenues from operations have increased at a CAGR of 44.6% between fiscal 2017 to 2019. The net profit grew at a CAGR of 52.1% during the period. As a subsidiary of SBI, the company has access to SBI’s extensive network of 22,007 branches across India. The partnership enables it to market its cards to a huge customer base of 436.4 million customers.

The company will offer up to 130.5 million equity shares (or 14% of the company) via offer for sale route. This will include up to 37.3 million share sale by SBI and up to 93.2 million shares on offer by Carlyle Group. Currently, SBI holds 76 per cent in SBI Cards and rest of the stake is held by Carlyle Group. With Carlyle will be exiting 10% SBI exiting 4%, the company will also issue fresh shares which would see the company raise Rs. 500 Crores.

As per Macquarie (a multi-national financial services company), in case SBI Cards gets listed at a market cap of Rs 60,000 crore, it could be the most expensive financial services company in India at 11 times the book value! The share sale is poised to become the fifth-largest IPO in the country after Coal India, Reliance Power, GIC Re, and Oil and Natural Gas Corp and will help the parent, SBI, raise funds to boost credit growth.

Written by Utsav Kadam

Edited by Mohit Doddi