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The Colour of Money: banks rush to sell credit cards

Kishori Gopalkrishnan in Bombay

To charge or not to charge, that is the question uppermost in the Indian consumer's mind. And nationalised banks having realised this, more and more of them banks and the credit card companies are entering the Indian market. The consumer has never had it so good!

Inundated with offers promising low annual fees, low-interest rates, frequent flier miles, bonus points and endless assorted goodies, the plastic paradise is only a breath away for the consumer.

The sluggish nationalised banks, often conservative and loath to rush in where most others do, have also realised the upside potential of credit cards. Waking up to the reality that electronic payment spells 'Big Money', banks are moving in a big way to tap the growing consumer spending by the middle class, whose numbers remain debated between 100 million to 300 million.

The credit card business was spearheaded by the savvy and technology-strong foreign banks such as Citibank, Standard Chartered, ANZ Grindlays, Hongkong Bank, among others. The very few public sector banks which early on ventured into the field ended up as poor second cousins, despite their deep reach to consumers through their enviable branch network.

But the times, they are a-changing. Customers are nowadays not just using cards credit cards just as transaction instruments, but for what its actual purpose: to use credit limits and revolve outstandings.

Nationalised banks have sat up and noticed the pent-up demand for credit cards, the high margins, and the changes in the market profile. The nationalised banks are moving in for the kill. Earlier, only the Bank of Baroda had a separate credit card subsidiary. But recently, State Bank of India announced a joint venture credit card outfit with GE Capital. And Bank of India has announced plans to hive off its credit card business into a distinct operation. Others banks, such as Central Bank, says they are not averse to the idea of floating a separate entity dealing entirely with the credit card section in the near future.

MasterCard International CEO and President Robert Selander pointed out that the Asia Pacific region is a significant growth area for the credit card industry in general and MasterCard in particular. He pointed out that the the region has surpassed Europe to take the the second slot, after North America, in both the number of credit cards issued as well as volume of transactions conducted on these cards.

He said Asia has the most voracious consumers who use credit cards with an almost insatiable wolfishness for purposes ranging from repaying car loans to annual vacations to hiring a car. The credit card gluttony of an Asian consumer, he claimed, is perhaps unmatched anywhere else.

Yet, what is the strategic advantage in spinning off the credit card business? While a separate structure does lend greater focus to the marketing of the product, updating technical support and honing the skills of staff, it also becomes a challenge to establish the business as an independent profit centre.

Senior banking officials, however, point out the advantages. "The banking business is so varied that the credit card division gets marginalised when it is a part of the entire business. A separate unit can develop its own technology, become an independent profit centre with its own profit projections, and recruit its own staff,'' says S Doreswamy, chairman and managing director, Central Bank of India.

According to Kanta Jhingiani, assistant general manager at the Bank of India, ``The credit card business comprises both quality and quantity. We are looking at consolidating the investments that has been made on people and infrastructure. That way, we can ensure that we are not wasting our investments and also give the consumer products of international standard.''

Although GE Capital manages over 70 million cards worldwide and has an asset base of over $18 billion in the form of credit card receivables, it still decided to team up with the State Bank of India due to the strategic advantage of SBI in terms of its extensive branch network (SBI has the maximum number of branches worldwide, over 6,000) and an already strong depositor base which could be future clients.

Since the entry of SBI into credit cards was inevitable, GE probably saw more success in joining hands rather than fight an established player on its home turf.

This might also be the reason why ICICI Bank has entered into a franchisee agreement with BOI. A comparatively new private bank, ICICI Bank is still not in a position to match the retail branches available with the nationalised banks.

With a total number of 185,000 cardholders, Bank of India has issued the maximum number of credit cards among the nationalised banks. BOI, as a principal member, will give backroom support to its affiliates -- ICICI Bank now being one of them. The affiliates, on their part, will market the product and recover the dues. Already, BOI has six nationalised banks as its affiliates.

With the nationalised banks moving into higher gear, the foreign banks, who have so far had an almost free run in the country, are preparing for the showdown. "Card issuers will need to sharpen execution of their existing strategies. For us, this will mean increasing our focus on business development, product innovation, leveraging of credit and risk management,'' says H Duggal, country head of Standard Chartered's credit card business.

But the Indian system also possesses certain flaws. ``The disadvantages of floating a separate entity could range from dilution of brand image to problems of leveraging the existing infrastructure of the parent organisation,'' warns Duggal.

For instance, points out Doreswamy, while the subsidiaries will be using the bank's branches as outlets, the bank staff may not push themselves to market the product or recover dues as it is theoretically a `different company'.

``Motivating a bank employee to work for a separate entity in which he has no locus standi will be a challenge," he says.

This ticklish issue apart, there are the twin problems of recovery and proper infrastructure facility -- areas where foreign banks have beaten them hollow. Sources point that the percentage of bad loans or default is as high as 30 per cent -- a cause for serious concern as it will weigh down negatively on the capital adequacy requirements of banks.

On the infrastructure front, too, Indian banks have progressed little while the technology of Citibank and Standard Chartered (the two major players in the Indian credit card market) have put them years ahead. And this infrastructural backwardness (in technology and other is a loophole that a customer can exploit.

For instance, some clients may opt only for cards of nationalised banks since payment `statements' arrive two to six months late! This in turn means that banks suffer a huge loss in interest income due only because of their negligence and improper accounting systems.

Nationalised banks will have to put in place alternative mechanisms and arrangements to tackle these hurdles, which will be crucial factors in determining the success or failure in the increasing competitive credit card market. As a senior banker sums up: ``It is a matter of mindset and the staff needs will have to be motivated to take up the challenge. They must realise that a day lost is money lost.'' Whether they do so or not, remains to be seen.