According to RBI’s statistics, in November 2018, over 1 billion cards were issued in India. Only 40 million of the outstanding cards are credit cards, whereas there are approximately 400+ million consumer credit records with the bureau, according to estimates. Clearly, the credit cards market is significantly under-penetrated. One of the reasons is the constrained universe of issuers that currently only comprises of banks (on the automatic route”). NBFCs are practically constrained from the credit card market on account of high access barriers, both for the issuance of “general” credit cards and co-branded cards. Furthermore, they are altogether foreclosed from issuing variants of other cards like charge cards, debit cards, and stored value cards.
This article will first point out the bottlenecks inhibiting NBFCs from accessing the credit card market as issuer from a general as well as a co-branded vantage point. Enabling NBFCs will have the two-fold advantages of deepening digital payments and facilitating the creation of credit history for new-to-credit borrowers. On the other hand, since NBFCs are regulated for prudential norms and capital adequacy, enabling them to offer a revolving credit product will be consistent with prudence.
Bottlenecks for NBFCs To Issue Credit Cards
At present, only banks may issue credit cards “on the open route.” NBFCs intending to issue credit cards have to take prior approval of the RBI. Furthermore, the eligibility thresholds are in addition to approval from the RBI and also require the “applicable NBFC” route.
The minimum Net Owned Fund (NOF)(1) for an NBFC to apply to the RBI for issuing credit cards is INR 1 billion.(2)
The RBI may impose any other conditions as it may think fit.
Furthermore, the NBFCs cannot issue any other types of cards including debit cards, smart cards, stored value cards, and charge cards.
The RBI also restricts the NBFCs from issuing co-branded cards. The guidelines for the issue of co-branded credit cards require the NBFC to adhere to the following (among other things):
The minimum NOF for an NBFC is INR 1 billion.
The company should have made net profits according to the last two years’ audited accounts.
The percentage of net NPA/net advances according to the last balance-sheet is not more than 3%.
Note that while the RBI stipulates conditions of prudential nature for eligibility, the RBI envisaged the NBFC to bring its distributional and marketing reach to the co-branded partnership. The banks took the credit risk.
Benefits to the Lending Market
Less than 10% of India has access to formal credit. The absence of enabling formal “seed credit” can unleash a vicious cycle and keep an excluded segment potentially and perpetually excluded. One of the strategies that offer a way out to such excluded persons is to build credibility through a revolving credit instrument like a credit card (secured against a deposit initially for instance).
Relatedly, in recent years, NBFCs have outperformed banks in credit deployment. By leveraging technology, they have augmented their distribution powers to serve otherwise under-supplied segments. NBFCs have capitalized on the inability of banks to scale rapidly (given their op-ex overhang and rigid policies). Retail and MSME have been key growth areas of NBFCs with INR 7.5 trillion of credit outstanding as of FY 2018.(3)
Thus, widening the universe of potential issuers offers the promise that the newly eligible NBFCs will chase a differentiated segment of prospectives by customizing the product to the latter’s specific situation (e.g., the secured credit card for new-to-credit customers). Since NBFCs report credit behavior to the bureau, a consistent track record of repayment increases the number of potential consumers for the formal credit market down the road. This policy move will also facilitate bridging India’s low household credit to GDP ratio lagging several major economies.(4)
Finally, on the regulatory side, NBFCs are regulated by the RBI for capital adequacy and prudential norms. They create credit in other respects over a wide range of segments including personal loans and SME credit. So, enabling NBFCs to offer credit cards appears to be consistent from a risk perspective as well.
Benefits to the Digital Payments Market
The incentives to create credit history are baked into repetitive use of credit cards by the new-to-credit consumer. Even for the differentiated mature user, card economics is sorted out through rewards programs that the issuer designs for the card user. This has knock-on benefits for the digital payments market because it increases the base of active users of digital payments artifacts. Co-branded credit cards have the potential to drive loyalty/stickiness through incentivizing repetitive use for a given service.
Moreover, by enabling NBFCs to issue credit cards, regulations will also create a class of service providers naturally interested in proliferating the card acquisition infrastructure. This will facilitate bridging India’s low PoS per million density*(5)*, the lowest among the BRC according to an estimate.
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NOF is calculated basis, paid-up equity capital and free reserves.
Master Direction DNBR. PD. 008/03.10.119/2016-17 dated September 01, 2016
“PwC, Building the NBFC Of the Future” (2018) p.9
See footnote 9, p.9
Watal Committee reported that it is 1066 PoS per million. Compare that with Brazil that had 33,000 PoS per million. For illustration.