HDFC Bank has reached the pole position as the top credit card issuer in the country despite being one of the late entrants in the market. And even as the rest of the industry has been shrinking their size, HDFC Bank has been adding big numbers. Today, it has close to 6 million cards and has a market share of 30 per cent. It is also a major player in retail loans segment disbursing loans of about Rs 5,000 crore every month. To understand how the bank reached its leadership position we met Mr Pralay Mondal, the bank's head of Retail Assets and credit cards. Excerpts from the interview:

Give us an overview of the credit card market today. Why has it shrunk by over 6 million cards?

After the global meltdown in 2008, the personal/unsecured loan space has not done well. That has happened on the back of some tremendous growth seen before that. This market used to grow at between 40 and50 per cent year on year for three to four years before that. When the global meltdown happened, a lot of portfolios faced accelerated delinquencies. In the process, many banks became very cautious and started weeding out cards, or limiting the ‘limits'. Then customers also started spending a little less.

But as we talk now, spends have started going up. The latest numbers show that total spends (outstandings) are still in the negative by 10 per cent year on year compared with about 28 per cent growth previously. We expect that to continue for another two quarters. After that we will see some improvement because of the base effect. And the good part is retail spends are positive now.

Why is penetration of credit cards so low in the system?

Broadly, card penetration is more about logistics and distribution rather than credit crunch or anything like that. Now it is an execution issue — merchant acquiring, issuances, going to deep geographies, electronic payments, how customers can be incentivised to use less of cash — it's a combination of many things.

In Korea for instance, the government wanted to create transmission of money through the electronic system and they provided tax concessions and compelled merchants to accept cards — so now about 60 to 70 per cent of the payments there happen through cards. I don't think it will happen here. But even if we move from 2 to 5 per cent and then from 5 to 15 per cent that will be good improvement.

You are now the largest card issuer in the country despite being a late entrant. How did you reach this position?

We really started getting our act together on cards from 2004 onwards. We have done well because we have been careful about our distribution, our branches and our internal controls. We have been cautious generally but we have also been aggressive during the growth cycle. We have the best portfolio in the industry with the highest margins and lowest NPAs. We have about 6 million cards now and are adding between 80,000 and 100,000 cards every month which is three times more than our next highest competitor. We have also launched a number of card products in the super premium category. We have not lost money in this business since 2004.

What kind of volumes are you doing in retail loans? Do you see a slowdown?

If you take our entire consumer assets portfolio, we are market leaders in most of our products. We have about 13 products which account for about 50 per cent of the bank's portfolio. We have between 25 and 30 per cent market share in each of the products. In retail assets we are doing about Rs 5,000 crore a month or about Rs 60,000 crore annually. Many top banks have only about Rs 20,000 crore in retail assets – and remember we don't do much of home loans. If you take home loans out, then our non-home loan retail portfolio accounts for about 44 per cent of the bank's asset book. The next best may be someone with about 30 per cent and the next one will be in single digits. That is the kind of dominance we have in the retail space.

We are getting into deeper geographies — into tier-2, tier-3 towns. We are now present in 1,111 locations with 2,222 branches. In many of the smaller towns, labour income/wage levels has gone up and this is leading to a rise in demand for goods and services. So, whether it is a tractor or a two-wheeler or a small commercial vehicle, there is a lot of potential. We are very positive on the retail market — although there is undeniably a slight bit of slowdown.

Why do banks lose so much money on credit cards business?

Banks are in the business of taking risk. You have to operate at multiple levels in this business. In the higher band, you have to understand, why you are in that segment. It is not about making money. It is about customer engagement. The overall relationship matters.

In the median band, neither will you make too much money nor will you lose much money. In the lower band, you will seem to be making a lot of money when the going is good — but you'll lose everything with a multiple of 3 or 10 when the cycle turns. And this is where people made mistakes. You have to see it as a long-term business. This is not about one or two years' business. This business is about chasing the right customer at the right time.

And not on all customers do you lose due to credit risk. You need to have strong systems and processes. And one has to have a genuine intent to resolve the issues that crop up occasionally on customer service. We too have had problems and it is not that we are right all the time. But we have shown intent to solve issues and that has taken us some distance.

What we did right was also to invest a lot in back-end systems — more than Rs 100 crore in mainframe systems — that are not be found anywhere else.

If most players are not making money, then why are there new buyers acquiring the cards portfolio of some banks now? What about your bank? Aren't you buying anything?

The ones who are selling are generally not very big players in the retail business. Banks which have a single product focus or mono-liners are getting isolated. In India, mono-liners will not succeed. You need to have a number of retail products for customers and you can succeed in this business only if you leverage your relationship with customers.

Some deals happen because some banks want to have a relatively quicker entry into the system. From my perspective, I have to see how much it will add to my portfolio and what is the pain in terms of integrating the new portfolio with my older portfolio. Does it make a lot of sense in terms of other products? Can I make money in the next 12 to 24 months? If you have a long-term view of the cards business, then you have to take a holistic view. If you want to be a long-term player, you also need to be in the merchant acquisitions business and not merely issuing side.

And as for acquiring other banks' card portfolios, it doesn't work for us. The kind of portfolio that is being offered for sale, we can do that volume in one month. It doesn't make sense for us. But for some others it could make sense because it gives them a quicker entry even if it is at a slightly higher cost.

For the last few years, you targeted your own customers for credit cards. Now there seems to be a slight change in your strategy and you are looking at other customers. Why is that happening?

We have now become an accepted brand and there is a lot of word-of-mouth publicity for our cards. While we will always focus on our internal customers, on a separate perspective, we would like to get at least 25 per cent from external customers. That is a market that is waiting to be taken because others are not growing at this pace. And once they experience our services as a credit card customer, there is always the possibility of deepening that into a banking relationship and going on to other products. So for those reasons, we are now looking at other customers too.

Earlier, we were more focussed on internal customers because firstly, we have to do this in phases; secondly, we didn't have a strong credit information bureau and thirdly we hadn't understood the customer fully then. Today, those things have been taken care of.

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