The phrase 'what goes up must come down' fits well with the current nervousness in the credit card business of banks and pure play credit card players.
The credit card issuers have suddenly turned cautious in increasing their exposure to weak customers in terms of leverage or people with history of payment delays and defaults and also segments like commercial or corporate cards which are risky in nature.
The first signs of danger have come from the card subsidiary of the largest bank in the country, the State Bank of India. The second largest card issuer in the country, SBI Cards & Payments, has seen its gross NPAs doubling to 4.29 per cent in the second quarter (July-September) of 2020-21. This spike in gross NPAs is despite a six-month moratorium post COVID-19 which ended in August and a two-year restructuring which is underway.
The credit card outstanding data released by the RBI had also indicated a cautious approach. There is a negative growth of 3 per cent in the first five months of 2020-21 with credit card outstanding at Rs 1.04 lakh crore.
This growth was over 10 per cent in the corresponding period of the previous year.
The high growth in unsecured loans especially in credit cards and personal loans over the last four to five years is now going to moderate because of higher delinquencies. In fact, personal loans and credit cards were two segments within retail that were growing at over 25-30 per cent for some banks.
Globally, the banking regulators are also expecting higher default rates because of slowdown in the economy, wage cuts and job losses. People tend to default in personal and credit card loans first than on home or car loans.
Clearly, the chickens are coming home to roost for the aggressive credit card issuers. The private sector Axis Bank is claiming that it has been consciously rationalising non-profitable and high-risk segment of commercial cards business since the second quarter of 2019-20.
The old private sector bank RBL Bank has told analysts this week that it expects 5 per cent of their credit card customers, who availed the benefit of moratorium to slip into default in the near future.
But experts suggest the large-scale credit card delinquencies won't come out soon as the two-year restructuring will hide the real picture of NPAs.
Take, for example, SBI Cards has permitted a one-time restructuring by offering card holders an option of converting credit card dues into EMIs of up to 24 months. By September, the SBI's card subsidiary has already converted Rs 21.08 crore outstanding balance under the restructuring scheme.
The expectations of higher delinquencies will also impact the profitability of card business. The banks will also have to make higher provisioning from profits for the likely losses after the restructuring is over.
The RBI has directed banks to create a 10 per cent provisioning, but this won't be enough if the NPA comes in large numbers.
After the global financial crisis in 2008, the unsecured loan segment saw a major shake-up in the Indian market. Many NBFCs offering low ticket personal loans had to shut shop, while others changed the business model to a more diversified one and few banks had put brakes on their credit card ambitions.