Credit cards

NBFCs play (credit) cards well but selectively

Shahid’s laptop stopped working in the middle of an important project. Normally, he would buy gadgets from the nearest Vijay Sales or Croma outlet in Chembur, Mumbai.

This time he wanted to save a trip to the store and ventured online. But his credit card payment was declined because he had exhausted his credit limit.

Just when he thought the store visit was inevitable, he received a text message from his bank. Sensing that Shahid has a big purchase to make, the bank offered to extend the credit limit on his card by ₹1 lakh and it came for free. Within 30 minutes of accepting the offer, Shahid bought the laptop.

A missed opportunity

For Bajaj Finance, Shahid is a missed opportunity because, unlike in the past, he did not walk into a store to buy the gadget on credit from the lender. This is why four months after the Reserve Bank of India (RBI) allowed Non-Banking Financial Companies (NBFCs) to apply for a credit card license, Bajaj Finance is vying to get one.

It has a base of over 30 million customers, and almost 95% of them probably use credit cards issued by a bank and not by the NBFC.

Poonawalla Fincorp, which is gearing up to make a splash in consumer finance, also wants to get into the credit card business. The same goes for Cholamandalam Investment and Finance Company, which has recently ventured into the consumer credit arena.

The growing interest in these NBFCs is understandable, given the increased competition in the retail lending market, especially between banks. Consumer credit is back in full swing – it’s just that this time they’re playing the cards.

Instead of providing unsecured consumer loans, banks are making better use of their credit cards.

Easy plan EMIs, instant credit limit top-ups and attractive cash back instead of reward points are the popular tools that banks distribute to entice customers.

“We realized that if we could get money back into clients’ accounts quickly and with the least amount of interference, except for basic signing, we wouldn’t see them migrate to BNPL or zero-EMI loans. of NBFCs,” said the head of retail banking.

According to a global report by Experian released in April, while BNPL is replacing credit cards in most countries, in India the tide is still in favor of plastics.

“That’s why banks have decided to play the proven model of credit cards, rather than turning to alternative products in the field of consumer credit,” said the banker quoted above.

The regulator may also have played a role in this decision as between 2017 and 2019 the RBI came down quite heavily on banks that entered the consumer lending market and positioned themselves to compete with Bajaj Finance or Capital First (now merged with IDFC Banque which will be called IDFC First Bank). “Being unsecured risky products, the model didn’t work with the regulator,” said the former retail manager at a private bank.

Although credit cards are also unsecured products, the ability to price risk is higher than other unsecured loans. The current fiscal year could see at least 2-3 NBFCs enter the credit card space and competition is expected to intensify.

But the question here is, will credit cards, as a product, be the engine of NBFC growth?

Not quite, say officials of asset-backed NBFCs, whether in the housing or auto finance segments. The credit card industry has been widely open to NBFCs since 2014.

In that sense, the April 2022 circular, which spelled out the requirement to seek specific approvals from the RBI to operate credit cards, was like rekindling an old interest.

Ramesh Iyer, MD and VC, M&M Financial Services, says the increased readiness of NBFCs today compared to 2014, in terms of technology and customer service, could have given the RBI the confidence to consider this segment favorably for issuing cards.

“To me, the circular review seems to be from that perspective,” says Iyer, though he is quick to add that he doesn’t yet see a big rush from NBFCs to have their own card licenses. credit. There are two reasons why NBFCs may hesitate. In the case of vehicle finance companies or low cost home loans, the customer’s EMIs could be around ₹4,000-20,000.

“If I start issuing cards for this segment, I’m either hijacking the borrower’s ability to repay or just cannibalizing my product offering. Either way, I’m a loser,” says CEO of NBFC Diverse Segment

Iyer believed there was still room for NBFCs to do better in their respective lines of business before they could think about diversifying their product base. “First of all, we need to make sure our core starts to grow well before we can add many more like this. It’s not that all of a sudden the product has become very attractive to NBFCs. and our customers are waiting in line to get credit cards.

Therefore, while Credit Cards as a business has reopened for NBFCs, there is a clear distinction between who would view the business favorably and who would not. Unless a lender wants to crack or defend market share in the consumer loan market and has deep pockets to experiment with, this may not be in everyone’s interest.

But credit cards are among the highly profitable and yield-generating products, and NBFCs may not want to miss this opportunity permanently. Over the next couple of years, as NBFCs once again return to the high growth zone, we will know if the April flyer will follow the path of its predecessor or be groundbreaking.

Published on

August 28, 2022