Indian credit card industry

Abhishek Kumar
5 min readJan 29, 2020

There has been a lot of talks around the Indian credit card industry with the impending SBI Cards IPO. The article briefs the industry.

Industry — Size and Moats

While at 925mn debit cards are highly penetrated, credit cards is still a nascent industry ~ 50mn card base (3.5% per capita, unique cards ~60% of this), 1.2% of bank credit and 3% of spends/GDP. The top 3 players — HDFC, SBI & ICICI corner >50% market share ( And top 5 corners 75% market share) in the segment and there is a strong entry barrier in terms of creating the initial opex needed to attract customers — rewards infrastructure and Merchants network — The gestation periods are really long here.

The long gestation period results in excellent rewards for big players. RoE are great (>30%), growth is ~20%+ & there is no reason for the growth to slow down for next 10–15 years. A fast growing business with low competition and high entry barriers is a textbook definition of a moated business.

There are some risks in terms of MDR reduction for bank led models, but the industry lobby is strong here & given significantly lower penetration compared to debit cards, where MDR is an issue, there are less visible sign of this risk playing out in near-medium future. While MDR in debit card is regulated, it isn’t in credit cards. The risk of MDR being regulated persists, but given that debit cards are for financial inclusion & credit cards are essentially for top of the pyramid customers, it seems unlikely (at least in the near term).

Total CC outstanding currently in India stands at Rs. 1.2 tr (1.2% of total credit). At 10%/20% cards/spending growth (lower than historical levels), we will still be at significantly lower penetration levels. There is huge market to tap here and the leaders are set to do it. Sample this — CIBIL has 550mn records but unique credit card customer base is mere 32mn — sub 6% penetration in credit cards. Moreover, of the 550mn,~220mn are prime/prime plus (700 plus score), implying sub-6% penetration even in that category.

As per latest Edelweiss report, the number of credit cards is expected to grow to 83.5 mn card by 2025, with card penetration at 5.8% and per card spends at Rs. 2.27 lakhs per year. IMO, this is low and I expect the card penetration to be much higher driven by increasing credit spending trends among young workers. The profit pool is expected to increase to Rs. 100 bn+ by that time.

Key moats for current players will mean increased penetration by top 3 players — Inherent customer base (low acquisition cost), better merchant acquisition infra (enables better throughput, customer retention through reward points & cash backs) and strong analytics. Players with high cross selling potential and larger POS market share will be the key beneficiaries of the credit spending trend. Surprisungly, SBI has as much profit % as HDFC and is better than all players except HDFC, but that might just be because of lower provisions.

Business and Fees Dynamics

Business dynamics of credit cards hinge on three key pillars: a) revolvers & interest rate (APR) impacting NII — Usually revolves around 40%; b) other income (intercharge); and c) asset quality. All of which gets stronger as a player becomes larger.

The key to note here is that HDFC owns 15% of merchant network, SBI another 15%, ICICI does 10%, while Axis does 11% — This is a virtuous cycle where large merchant network feeds on providing better credit card network & vice-versa. The big ones will become bigger here.

The fees dynamics are very different when issuer and acquiring banks are same — Costs gets reduced for merchants by as much as 18%. Given this, merchant networks are the key moats here — And hence difficult for any new player to break into.

The fees structure for credit card issuers revolves around 2 things — Interest income (from people not paying amounts in full) and non interest incomes. Non interest income consists of MDR fees, subscription based fees, spend based income and instance based fees (Cash ?). The usual split here is 50/50.

The expense part usually consists of employee costs, rewards point costs (Hope that people don’t use is strong here) and delinquencies. In fact, there was a time in India where credit cards went bust in 2008–2010 and there are signs of stress in the system with increased safety perception of retail loans and credit cards , there is increased probabilities of another similar bust is high. And this is where a lot of “sensible” lending/ CC approvals will come into play.

A major crisis may be brewing for Indian banks. Job cuts turn the idea of individual lending being risk free passe. The exposure to unsecured loans has risen. See the following article.

So historically conservative Indian banks led credit cards like HDFC (they did pretty well when CC went bust last time), SBI (try getting a credit card from them!) will do better than others including MNCs who have a tendency to give out CC rather easily.

Better analytics combined with evolution of credit bureaus (Corporate credit system is admittedly fuck all, but retail credit scoring system in India has evolved pretty well, bordering on fanatics at times) means increased risk management systems now.

>70% of CC customers in the system are now prime and prime plus ( >700 Cibil score) and this will help in preventing any near-medium cracking of the CC system.

However, lenders need to be disciplined in underwriting as unsecured lending is vulnerable to liquidity squeeze.

Another key thing is that HDFC and SBI have higher internal customer ratios compared to MNC players and cracking possibilities are lower for internal customers

SBI card IPO looks to be strong even at premium to international players given ~35% loan growth, ~39% revolver net revenue growth at 44% CAGR since FY16 and higher fees, non interest based income compared to other players. Own customer penetration at ~3% provides huge growth runway for lower risk customers

Reward points per card is higher than HDFC/ICICI at Rs. 540 compared to Rs. 300 for HDFC.

GNPAs have remained stable at ~2.5% and NNPLs at 0.8% levels. They have one of the best provisioning among all card players as well. RoAs are strong at 4–4.5% levels.

Overall, a good company and a good sector to look forward to.

Look at conservative card approval process, delinquency levels and combine this with strong merchant network and rewards infrastructure to identify a winner here.