The steady rise in credit spends has not enthused non-banking financial companies (NBFCs) to launch credit card operations. Instead, these non-bank lenders have preferred to operate in conventional lending products like consumer durable loans, personal loans, and micro, small and medium-sized enterprises (MSME), say experts.
In a master direction released in April 2022, Reserve Bank of India (RBI) issued master directions for credit cards wherein it had said that NBFCs can only get into the credit card business with prior approval.
However, it has been over a year now. Yet none of them have gone ahead and launched. “Now, there are a lot of instruments. You need not be giving credit only through credit card. Since our lending is mostly for business and not for consumption, we not may be immediately interested in credit cards,” Shriram Finance Executive Vice Chairman Umesh Revankar told FE in a recent interaction.
According to the directions, any company including a non-deposit taking company intending to engage in credit card operations shall require a certificate of registration, apart from specific permission to enter into this business. The pre-requisite to start credit card operations is a minimum net owned fund of Rs 100 crore.
Currently, NBFCs can issue credit cards either individually or in a co-branding arrangement with card issuing banks and non-bank lenders. The co-branding arrangement shall be in accordance with the board approved policy of the card issuer.
While many NBFCs currently have co-branding arrangements with banks, not too many NBFCs keen on starting standalone credit card operations due to the cost involved in issuance of the cards and to maintain and build an entire credit card network for its customer base from scratch, say experts.
“Another challenge in the process of issuing credit cards for NBFCs could be the very fact that the NBFCs are not allowed to issue credit cards without the prior approval of RBI,” says Siddharth Srivastava, partner, Khaitan & Co.
Srivastava noted that there have been instances in the past wherein RBI has been rather stringent in providing its approval to NBFCs for issuance of even co-branded credit cards.
Broadly, experts highlight that there are three key business considerations in a credit card business. These are a strong underwriting capability to identify good credit from bad credit, a robust brick-and-mortar network along with a strong vendor network for efficient collections, and a strong customer service for query and dispute management.
“Even if the NBFCs were to decide to invest in this infrastructure, credit card as a stand-alone product will not justify the costs of running such operations,” says Vivek Iyer, partner, financial services – risk, Grant Thornton Bharat.
SBICards and Payment Services and BoB Financial are non-banks with a sizeable market share in the credit card segment. However, they are promoted by two of India’s largest public sector banks.
But unlike banks, pure-play non-bank lenders do not have access to low-cost current account savings account deposits, which makes launching credit card operations an expensive affair, say experts.
For banks, a lot of the customers are existing customers and are hence, easy to cross-sell. Due to this, customer acquisition cost is lower. On the other hand, experts contend that a majority of NBFCs focus on low ticket customers who are not necessarily bankable from a credit standpoint. These have weaker documentation, weaker collateral and hence, do not make for ideal credit card customers.
“If there is a default, the bandwidth will go in addressing that default instead of the core business of the NBFC. It did not make a lot of business sense for NBFCs to get into it,” Bhavik Hathi, managing director, Alvarez & Marsal said, adding that it does not make a lot of business sense for NBFCs to launch credit card operations.
Sundaram Finance Managing Director and Chief Executive Officer Rajiv Lochan feels that credit cards are a thin margin and high volume business for which, NBFCs would need to put in place a whole new set of new capabilities.
“I cannot see NBFCs making a beeline for this opportunity,” Lochan said.