Why not credit cards for NBFCs? A tale of tears behind the plastic smile

Retailing has been transformed in recent years, but the central bank still hasn't allowed NBFCs to issue credit cards

It is not the best-kept secret that India has the lowest “credit-card activation rate” in the world. Over 50 per cent of cards are not activated by customers within the first 90 days of issuance. And, compared to the 550 million customers with credit histories, only 67 million carry plastic in their wallets.

Moreover, these 67 million are not “unique customers” — over 50 per cent of them have more than one card. The average per-card spend is about Rs 3,000 per month, and this is also misleading, as it rides on the back of a relatively small number of high spenders.

“It’s as if the majority of the cards are used by folks to scratch themselves when they itch,” says the top executive at a global payment network. A non-resident Indian, he lets on that he bought his car costing nearly $100,000 on his credit card, “and nobody asked any questions on my tax returns.”

Another senior official in the business feels the credit-card story in the country would have been vastly different had it not been made the sole preserve of banks. And this is despite the Reserve Bank of India’s (RBI’s) enabling circular of July 7, 2004.

The plot so far

India was seen as a tough market for credit cards owing to the lack of credit bureaus, which impacted the ability to underwrite risks. It particularly affected the cards business, given its unsecured nature. A few monoline issuers — standalone firms whose cards business is not within the fold of banks — tried their luck using data analytics, such as GE Capital and Capital One in the mid-1990s.

GE Capital teamed up with State Bank of India (SBI). Capital One has made many failed attempts — a joint-venture with Canara Bank being one — and it been trying the same for nearly two decades with the Life Insurance Corporation.

Tata Capital, Bajaj Finance and Reliance Capital engaged the banking regulator and worked every connection to make a case for entering the credit-card business. It did not work. As for co-brands between banks and NBFCs, it made no commercial sense.

“If we had gone on our own, it would have worked. But we had to grin and bear it, as the option was only to sit it out, because the RBI did not activate its July 7, 2004 circular,” says the boss of an NBFC.

Worse, the merchant discount rate (MDR) — the fee-sharing structure among the parties involved in putting through a card transaction — meant that many banks (state-run banks, in particular) did little more than pocket this inflow. There was also no incentive to push even co-branded cards. 

Chasing a million-odd customers and managing collections of dues, investing in technology and customising offers at the merchant level, calls for a different mindset; it is unlike hawking home or car loans. State-run banks were not up to the task.

Then again, co-branded cards failed owing to poor revenue-sharing; and this, even as card-spends continued to be low and the cost of funds, high. Co-brands in the more developed markets do very well, because spends are huge and revenue-sharing is fair to the partners involved.

What now?

NBFCs hope that the RBI will “operationalise” its July 7, 2004 circular based on the feedback received for its Report on the Working Group on Digital Lending through Online Platforms and Mobile Apps, which was put up for public comments last November. This view, though, is not shared across the industry. The scepticism arises from the possibility that, as in the past, banks may lobby against the entry of NBFCs.

“We have grown the credit market more than banks have over the last decade. We are allowed to do just about everything on the assets’ side, like banks. What is the special risk in credit cards?” asks the chief executive officer of a shadow bank.

It is an indirect way of conveying that the central bank has in recent years just about aligned every other regulation between banks and NBFCs. Another corner-room occupant at an NBFC observes: “NBFCs are on the Ind-AS, with its expected-loss provisioning norms. And this is a much tighter accounting regime, compared to banks.”

Adds another C-suite executive: “SBI Cards is an NBFC. You may say it is within the fold of a state-run entity. But then there are foreign investors like Carlyle involved with it. So, what if I want to enter this business? Let them (RBI) set stiff standards. We don’t want any special dispensation.” 

It’s been eighteen years since the central bank issued an enabling, but still-not-activated, circular on NBFCs’ entry into credit cards. Since then both the consumption and general retailing scene have undergone huge changes. Technology has changed everything from consumer on-boarding to collections. Banks have been disintermediated in just about every segment they operate in, by both traditional NBFCs and new-age fintechs. Of course, banks’ deposit turf remains intact. That’s about it. 

The RBI’s stance on NBFCs’ entry into credit cards has led to surrogate channels like “buy now, pay later”, and it has sought details on them — it fears that some of these arrangements may not be kosher. So, why not credit cards for NBFCs?

Now, it’s over to the central bank.