Credit card utilisation stays lower than pre-Covid levels

“We had cut limits, but that was a temporary thing and we went back to normal in a matter of months. But yes, consumption is still low and utilisation may be low for that reason,” said a senior executive with a large private bank.

“The sharp drop in spending as well as repayment by card holders could explain the drop in utilisation rate,” the report said, adding, “While the urban markets were less impacted by Covid, it does appear that bankers were cautious, especially as the high credit penetrated market saw the slowest growth in cards issued, growth in limits and outstanding.”
“The sharp drop in spending as well as repayment by card holders could explain the drop in utilisation rate,” the report said, adding, “While the urban markets were less impacted by Covid, it does appear that bankers were cautious, especially as the high credit penetrated market saw the slowest growth in cards issued, growth in limits and outstanding.”

The level of utilisation of credit card limits by consumers remains below pre-Covid levels as worries around successive waves keep them on the edge. According to a report by Kotak Institutional Equities (KIE), utilisation stood at 21% in FY21, down from 24% before the outbreak of Covid.

Part of the problem was the decision of banks to lower credit limits for their card customers in the immediate aftermath of the outbreak in 2020. While for some banks, lower limits were a short-lived phenomenon, lasting through the first eight-nine months of the pandemic, others were more conservative and retained lower limits in 2021. The tightening of credit limits may have made customers accustomed to spending less using cards.

“We had cut limits, but that was a temporary thing and we went back to normal in a matter of months. But yes, consumption is still low and utilisation may be low for that reason,” said a senior executive with a large private bank.

In a call with investors after its Q3FY22 results, credit cards market leader HDFC Bank admitted that even as spends have been trending up, utilisation of limits remains a problem. Srinivasan Vaidyanathan, chief financial officer, said until recently, the bank was tight on the credit limits. “The credit line utilisation is at a low. So, while the spend levels are up 24% and the interchange is quite robust and good with a good yield that we get on that, the credit line utilisation has got much more to do to get back to the pre-pandemic level.”

As a result of poor utilisation and a tighter policy on credit limits, HDFC Bank’s fee income from payments products and credit cards declined on a year-on-year basis in the December quarter. In addition, the tendency to revolve card balances also waned, with HDFC Bank still at about 70-80% of the pre-Covid levels in terms of revolving balances on cards.

In a recent report, analysts at KIE wrote utilisation rates have dropped in nearly all the segments of credit cards across limit ticket sizes. Growth has been slow in all the top states where credit cards have been issued and was stronger outside of metropolitan markets. “The sharp drop in spending as well as repayment by card holders could explain the drop in utilisation rate,” the report said, adding, “While the urban markets were less impacted by Covid, it does appear that bankers were cautious, especially as the high credit penetrated market saw the slowest growth in cards issued, growth in limits and outstanding.”

Worsening consumer confidence is also taking a toll on spending preferences. A recent report by the Reserve Bank of India (RBI) said the pandemic severely dented consumer confidence which reached historic lows as the repercussions of Covid-19 unfolded. A majority of the respondents in all rounds of the RBI’s consumer confidence survey reported higher prices and inflation compared with a year ago. “A general perception of high prices and rising inflation further aggravated the situation for consumers already worried by the employment scenario and general economy,” the report said, adding that consumers aggressively cut down on non-essential spending after the pandemic broke out.

KIE expects credit card spends to pick up as conditions normalise and lenders on-board customers at a quicker pace. “As more spend categories come back on track like international travel or foreign exchange, we should see this book contributing quite well to all leading credit card players,” it said.

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