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Cards business may witness fresh skirmishes

The action on the credit card front has been quiet so far. With HDFC Bank having become the largest card issuer and the banking behemoth SBI announcing a major expansion plan, a fresh battle may be brewing

India's largest lender State Bank of India (SBI) has announced its intention to put its credit card business on a higher growth trajectory. SBI Cards, which has witnessed a turnaround in fortunes over the past few months and seems to have buried the constant sniping between the two partners (State Bank and GE Capital), is now aiming to scale up its business further. SBI which has India's widest banking network will certainly use its clout to become the largest card issuer, a position from which ICICI Bank has just been overthrown by HDFC Bank.

For the last couple of years, expansion of the credit card business was kept on the backburner by banks. This was after a period of profligate expansion in the mid-2000s that saw credit cards being given away. Sales executives were stationed at petrol pumps, malls and airports to sweet-talk people into buying multiple cards which they did not need at all. Risk management practices were mostly thrown out the window in the desperate effort to rope in more and more customers. The most aggressive player in this segment was ICICI Bank, which had put the business in an overdrive till a few years ago. Some foreign players like HSBC, Standard Chartered, Citibank and ABN AMRO were also peddling credit cards at a furious pace.

However, as credit card losses started piling up in the wake of the financial crisis, these companies had to scale down their card business swiftly. ICICI Bank has almost halved its customer base to around 4 million credit cards now. Citibank shrank its card base to around 2.5 million from its peak of around 4 million. Overall, the industry has witnessed shrinkage of around 33%, with the cards base coming down from 27 million in early 2009 to 18 million in 2010.

Although HDFC Bank and SBI also took a hit, they have managed to achieve steady growth due to more prudent practices. In fact, HDFC Bank has now displaced ICICI Bank as the biggest player in this segment. Both HDFC Bank and SBI have adopted the strategy of tapping their existing customer base, sourcing a chunk of new cards from this arena. Among the pack, SBI has been the fastest to record a turnaround. While SBI Cards, too, had to rein in its cards portfolio by around 500,000 customers, the company (with a card base of 2.6 million) claims to be the first one to turn in a profit after two years of losses. This claim makes little sense, since there are hardly any independent credit card companies.

Buoyed by the increase in consumer spends over the past few months, SBI Cards, a 60:40 joint venture between SBI and GE Capital, has decided to spruce up its business by focussing on the high net-worth customers. The company announced the launch of a new offering - SBI Platinum Card - that offers a wide range of benefits to the high-spending segment. The company plans to increase its customer base in this category from the present level of less than 5% to over 20% in four years. In fact, the affluent segment is set to become the primary target for most players in the industry, given the higher propensity to spend and lower risk of default.

The growth potential in this business is too attractive to ignore, if you believe the card companies. Credit card penetration in India stands at 1.6% of the population, compared to 235% in the US, according to an IDFC report. Even Malaysia has a deeper penetration at 10% of its total population. The market size is estimated to grow to around Rs350 billion by FY2012, clocking growth of around 35% over the next two years. Already, consumer spends have witnessed a steady rise over the past few years. The number of transactions per card has also witnessed a spike, pointing to the rising volumes.

However, in their pursuit of growth will the players tread with caution having learnt the lessons of the recent past? Asked what were the learning lessons for the company after the recession, Abhay Kumar Singh, CEO of SBI Cards said at the launch of its new product, "Never under-price risk in good times. We will continue to focus on a policy combining good underwriting and (risk) modeling". ICICI Bank, too, has learnt the same lesson and has adopted a much milder approach - it has toned down its acquisition of new customers from the open market. But with confidence levels among businessmen and consumers running high and SBI setting the pace, a new round of card war may be round the corner.

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