The credit card base has grown at a 18% CAGR during FY14-FY18, the current credit card base is only 45mn – this compares to 210mn customers with a 700+ CIBIL score (Super-Prime, Prime Plus and Prime), implying a 20% penetration and massive headroom for growth while staying on the same risk curve.
2 Big Credit Card Business Models in India The primary business model is centered on internal-to-bank customers (in practice at larger banks) while a secondary business model is emerging around new-to-bank customers (in practice at mid-sized banks). Large banks with a sizeable customer franchise grow their credit card portfolio purely as a cross-sell offering to their existing prime and prime-plus customers, resulting in lower acquisition costs (Rs800-Rs1,000) and lower delinquencies and anchor their revenue models around fee income.
The credit cards business revolves around two sources of income: NII – Net Interest Income (from revolving loans) and Fee Income. Fee income is currently the largest driver of credit card revenues as revolving rate / conversion into EMI loans remains low (driven by customer profile). Going forward, with higher spends and increasing propensity to convert to personal loans, we expect the contribution of interest income to increase proportionally.
The profitability of the credit card business has undergone a drastic change on the back of target segment re-jigging, better gating criteria and rational pricing, reflecting in low delinquencies that drive super-normal returns. However, given the fact that credit card is an unsecured product and attracts 125% risk weight, delinquencies may start inching up as the prime/prime plus pool gets saturated – however, delinquencies are likely to be substantially lower than historically-incurred losses (previous down cycle). We will Analyze the same in the next article.
The Distribution and Spend Capture of Credit Card Market in India
In the representation below, you will see that HDFC Bank is the Market Leader in Indian Credit Card Industry with 28.8% marketshare of the Spend and the Average Spend of consumer here becomes the spend of the Indian Industry. HDFC Credit Card Marketshare is equivalent to the combined share of SBI Cards + ICICI Credit Card + Axis Credit Card. One interesting Data Point to observe is AMEX Card Holders Spend in India is 3 times the spend of HDFC Cards.
Stay Tuned to Read on the Profitability and Scope of Retail Credit Lending by Mobile Apps.