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 around he wanted to save a trip to the store and ventured online. But his credit card payment was declined because he’d exhausted his credit limit.

Just when he thought the store visit was inevitable, he received an SMS from his bank. Sensing that Shahid has a big-ticket purchase to make, the bank offered to extend the credit limit on his card by ₹1 lakh and it came free of cost. Within 30 minutes of accepting the offer, Shahid purchased 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 the reason why four months after the Reserve Bank of India (RBI) allowed non-banking finance companies (NBFCs) to seek credit cards licence, Bajaj Finance is vying for one.

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

Poonawalla Fincorp, which is readying up to make a splash in the consumer finance space, is also keen on getting into the credit cards business. Same is the case with Cholamandalam Investment and Finance Company, which recently ventured into the consumer finance space.

The growing interest among these NBFCs is understandable, given how competition is heightening in the retail lending market, especially among banks. Consumer finance is back with a bang – it’s just that this time they are playing it the cards way.

Instead of handing out unsecured consumer loans, banks are putting their credit cards to better use.

Easy plan EMIs, instant top-up of credit limits and attractive cashbacks instead of reward points, are the popular tools that banks are handing out to woo customers.

“We realised that if we can put the money back into the customers’ accounts quickly and with least interferences, except for the basic sign-off, we wouldn’t see them migrate to BNPL or zero-EMI loans from NBFCs,” said the head of retail banking business.

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

“This is why banks have decided to play the tried and tested model of credit cards, rather than look at alternative products in the consumer finance space,” said the banker quoted above.

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

While credit cards are also unsecured products, the ability to price risk is higher compared to other unsecured loans. The current fiscal may see at least 2 to 3 NBFCs entering the credit cards zone and the competition is set to intensify.

But the question here is whether credit cards, as a product, will be the growth driver across NBFCs?

Not quite, say the heads of asset-backed NBFCs, whether in the housing or vehicle finance segments. Credit cards business has been wide open to NBFCs since 2014.

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

Ramesh Iyer, MD and VC, M&M Financial Services, says the increased preparedness of NBFCs today versus 2014, in terms of technology and their customer servicing, might have given the RBI the confidence to look at this segment favourably for issuing cards.

“According to me, the revisit of the circular seems to be from that point of view,” Iyer explains, though he is quick to add that he’s not seeing a big rush from NBFCs to have their own credit card licences just yet. There are two reasons why NBFCs may be hesitant. In the case of vehicle finance or small-ticket housing loan companies, the EMIs of the customer could be around ₹4,000-20,000.

“If I start issuing cards for this segment, I am either diverting the borrower’s repayment ability or I’m simply cannibalising my product offering. Either way, I’m at the losing end,” says the CEO of a diversified NBFC segment

Iyer opined that there is still scope for NBFCs to do better in their respective business segments before they can think of diversifying their product base. “First, we should ensure that our core starts to grow well before we can add many more like this. It’s not that suddenly the product has become very attractive for NBFCs and our customers are waiting in the queue to get credit cards.”

Therefore, while credit cards as a business has reopened for NBFCs, there is a clear distinction on who would look at the business favourably and who will not. Unless a lender is keen on cracking or defending market share in the consumer loans market and has deep pockets to experiment, it may not be everybody’s interest.

But credit cards are among the highly profitable and returns-generating products, and NBFCs may not want to permanently miss out this opportunity. In the next two years, as NBFCs return to the high-growth zone once again, we will know if the April circular will go down its predecessor’s path or be path-breaking.

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