For the past five years, India has witnessed a meteoric rise in its affinity for credit cards. By February 2023, over 100 million credit cards had been issued, a clear testament to this newfound love for plastic money. Banks, eager to cash in on the demand, went all out with enticing offers such as free airport lounge access, a perk that saw footfall soar. However, this boom now appears to be losing steam, and banks are pulling back. Why?

A Changing Landscape: Fewer Cards, Fewer Calls

In October 2023, banks issued less than half the number of credit cards compared to the same month last year. The decline is noticeable even in the reduction of spam calls pitching credit cards. Initially, this seemed like a result of stricter spam detection by telecom companies, but the real reason lies in the financial strategies of lenders.

Demand continues to stay strong signalled by increasing card spends

Despite a reported 45% decrease in the number of new credit cards issued in October 2024, credit card usage continues to demonstrate strong demand. Spending on credit cards remains robust, underscoring their ongoing importance in consumers’ financial habits. This aligns with banks and the RBI’s shift in strategies, suggesting that the market’s focus is evolving rather than contracting.

This trend highlights that while issuance numbers fluctuate, it doesn’t signify a declining interest in credit cards. Instead, it’s indicative of a market adjusting to regulatory and strategic changes, with demand staying high, driven by consumer spending patterns

The RBI’s Role in Tightening Credit Card Policies

A key factor in this slowdown is a regulatory move by the Reserve Bank of India (RBI). In November 2022, the RBI increased the risk weight on credit card receivables, forcing banks and non-banking financial companies (NBFCs) to allocate more capital to cover potential defaults. For banks, this risk weight rose from 125% to 150%, while for NBFCs, it went from 100% to 125%. This regulatory tweak made lending through credit cards more capital-intensive and riskier, prompting banks to reconsider their strategies.

The RBL Bank Case: Quality Over Quantity

RBL Bank, India’s fifth-largest credit card issuer, offers a compelling example of this shift. Between July and October 2023, RBL slashed its total credit cards in circulation by over 100,000 units—a 2% reduction. The reasons for this are twofold:

1. Inactive Cards: A significant number of RBL’s credit card holders failed to activate their cards, leading to closures in compliance with RBI guidelines. If a card is not used within 30 days, it is deactivated by the 37th day.
2. Profitability Concerns: RBL realized that the income generated from many credit card customers no longer justified the cost of acquiring and servicing them. The bank is now prioritizing higher-quality customers who either revolve their dues or convert them into equated monthly installments (EMIs), which generate interest income.

SBI Card’s Struggles in Tier 2 and Tier 3 Markets

The story is similar at SBI Cards, India’s largest credit card issuer. The company reported a 30% drop in net profit in the September 2023 quarter, largely due to rising credit costs and shrinking margins. Its market share and customer spending also declined, driven by:

• Low-Ticket Transactions: SBI’s significant customer base in Tier 2 and Tier 3 towns primarily makes smaller transactions, yielding lower interest income.
• High Collection Costs: Servicing these customers involves higher costs relative to the income generated.
• Limited Appeal in Premium Markets: SBI has struggled to penetrate Tier 1 cities and attract affluent customers, which has impacted its ability to partner with premium brands for co-branded credit cards.

The Rise of Co-Branded Credit Cards

One bright spot in the credit card industry is the rise of co-branded cards. Currently holding a 10% market share, these cards are expected to account for 25% of the market in the next four years. Banks like RBL are seizing this opportunity, launching partnerships with brands such as Indian Oil Corporation and Mahindra Finance. However, SBI Card has lagged behind in this segment, largely due to its customer base and geographical footprint.

The Bigger Picture: A Slowdown in India’s Credit Card Frenzy?

The combination of stricter regulations, rising credit costs, and changing market dynamics suggests that the era of aggressive credit card issuance in India may be drawing to a close. While banks like RBL are recalibrating their strategies to focus on customer quality over quantity, others like SBI Card face challenges in adapting to these shifts.

As co-branded credit cards and premium customers become the industry’s focal points, the frenzy that once defined India’s credit card market seems to be evolving into a more measured, strategic approach.

---

This story highlights a significant shift in India’s financial landscape. Are you witnessing similar trends in your city or personal experience? Share your thoughts in the comments below!