The credit card subsidiary of State Bank of India, the largest bank in the country, is readying a war chest to fight the COVID-related non-performing assets (NPAs).
SBI Cards & Payments has seen its gross NPAs doubling to 4.29 per cent in the second quarter (July - September) of 2020-21. The NPAs are expected to remain at elevated levels given the slowdown in the economy and job losses.
The company has upped its funds from banks to Rs 19,000 in the second quarter. The consortium of half a dozen banks has provided Rs 2,500 additional funds to meet any short-term fund requirement because of a six-month moratorium , which ended in August this year, and also the two-year restructuring window, which is now available to cardholders.
The second largest card issuer in the country has also managed to rope in a new lender, HSBC, which has committed additional money.
So far, the promoter SBI has committed the highest amount of Rs 13,000 crore followed by Central Bank of India, Punjab National Bank, HSBC, Bank of Baroda and Sumitomo Mitsui Banking Corporation.
The expectations of higher delinquencies in card business are expected to impact the profitability. In the second quarter of 2020-21, SBI Cards profits dipped to Rs 206 crore compared to Rs 381 crore in the corresponding period of the previous year. The lockdown is the reason for low profits partly, but the finance and operating costs are also moving up. The card company also needs money for growth as the business has been growing at a scorching pace over the last few years.
Going forward , the company will have to make higher provisioning from profits for the likely losses after the two-year restructuring is over. The RBI has directed banks to create a 10 per cent provisioning, but this won't be enough if the NPAs come in large numbers after two years.
Many suggest the 4 per cent-plus NPAs of SBI Cards are already quite high even as it doesn't take into account the loan restructuring that is available. The company's gross advances or receivables book stands at Rs 23,978 crore.
SBI's card subsidiary is the only pure play credit card company listed on the bourses. The company's share price is Rs 817 per share with a 52-week high/low of Rs 968/645 per share.
Experts suggest that the biggest risk in investing in a credit card company comes from the unsecured nature of the business. In the past , the card businesses of banks have seen huge losses because of higher defaults. There was a time when banks used to waive off the annual charges to get more customers. This stopped after they started selling cards to existing customers with good track record of repayments.
The current slowdown in the economy for the last 18 months has created new challenges. There were instances of salary cuts and job losses post-COVID.
SBI Cards was set up as a joint venture between SBI and GE Capital nearly 23 years ago. Three years ago, the SBI and private equity player Carlyle Group had acquired the GE's stake. Currently, their shareholding stands at 74 per cent and 26 per cent, respectively. So, SBI Cards has a good backing of promoters in case they need more funds.