CREDIT CARDS HAVE been around for a few decades. In fact, it is the primary mode of payment for purchases in many countries. But in India, they had never really taken off as they were seen as being out of bounds for most of the salaried, and retailers were reluctant to accept them.
That is, however, a thing of the past. Not only are more and more people getting credit cards, but also they are using them more frequently. The most recent data on payments and settlement systems by the Reserve Bank of India says the number of active credit cards in India was 9.13 crore in August 2023. It was just 7.8 crore a year before that—that is a 17 per cent growth. In January 2020, it was just 5.6 crore. So, in some three and a half years, the number of credit cards surged 63 per cent.
The growth in credit card usage is even more impressive. In August this year, credit card spends touched Rs1.48 lakh crore, up 2.7 per cent from the month before that and up 32.3 per cent from August 2022.
What is driving this growth?
“The continued increase in discretionary spending on vacation, travel, entertainment and consumer durables in metros and beyond, and digital payments have propelled credit card usage in India,” said Puneet Bhatia, vice president, acquisition and product management, American Express Banking Corp. India.
Indians are swiping their cards everywhere. “PoS (point of sale) spends across all key categories, including consumer durables, furnishing and hardware, apparel and jewellery, have increased significantly, indicating consumers’ strong preference for offline shopping experiences as well,” said Abhijit Chakravorty, managing director and CEO, SBI Cards and Payment Services. Promotions by large e-commerce platforms in the festive season have also been a big driver.
In Amazon's recent Great Indian Festival sale, one out of every three purchases was made using the co-branded credit card Amazon Pay has with ICICI Bank, the Amazon Pay Later option or via EMIs (equated monthly instalments). The usage of the Amazon Pay ICICI credit card soared 65 per cent, said Mayank Jain, director, credit and lending, Amazon Pay India.
Co-branded cards offer excellent value proposition to users. For instance, Amazon Prime members can get up to 5 per cent cashback each time they use it on Amazon. “You can maximise benefits by capitalising on exclusive rewards, discounts and perks offered by the partnering brands,” said Gaurav Chopra, founder and CEO of IndiaLends.
Promotions and offers by banks on EMI purchases on cards is another driver for growing cards usage. In the first 48 hours of Amazon's Great Indian Festival sale, EMI payments emerged as the top choice, with one in four shopping orders placed in instalments, and three out of four EMI orders qualified for no-cost EMI benefits, said Jain.
The biggest boost, however, would have been the option to link credit cards to UPI. For now, this is restricted to RuPay cards. “Customers will benefit from the ease and the increased opportunity to use their credit cards. Merchants will benefit from the increase in consumption by being part of the credit ecosystem with acceptance of credit cards using asset lite QR codes,” said National Payments Corporation of India, which manages UPI.
Many retailers, especially smaller ones, were earlier not keen on accepting credit cards owing to the charges associated with them. For instance, a retailer would need to buy a PoS machine and pay the merchant discount rate (MDR), generally two to three per cent, as well. If a consumer makes a purchase of Rs10,000 and pays by credit card, the retailer would have to pay an MDR of Rs200 to Rs300.
There are no such charges on UPI payments. Also, the person paying via the credit card linked to UPI can scan the same QR code that one would scan for normal UPI payments and all the payments can be consolidated in just one app, making it convenient to monitor and manage all the expenses.
Parag Rao, country head of payments, liability products, consumer finance and marketing at HDFC Bank, said his bank had seen a ten-times growth in UPI on credit card spends in the past six months and it had around 45 per cent share in the segment. Chakravorty of SBI Cards said 9 per cent of its RuPay cardholders had enrolled for the UPI usage.
A lot of this growth is not from the metros. It is estimated that by 2025, tier III and tier IV towns in India will have a combined GDP of around $1 trillion, and they would add around 250 million new financial consumers to the market. “Aspirational young Indians with high disposable income, increased awareness, and heightened taste for premium have been empowered by economic growth, growing entrepreneurship, and deeper penetration of e-commerce. This is propelling growth in spending on cards like never before,” said Bhatia of American Express.
The rise in credit card spending mirrors the strong growth the banking and financial services industry is seeing in retail credit, especially unsecured loans given to consumers. According to the financial stability report of the Reserve Bank of India, overall gross advances grew at around 14 per cent between March 2021 and March 2023. Retail credit grew at a compounded annual growth of around 25 per cent in the same period. Credit card dues crossed Rs2 lakh crore for the first time earlier this year. This surge in retail lending has got the RBI concerned, with the regulator warning banks and NBFCs to be careful.
“If you look at the past couple of years, the year-on-year average growth on retail credit has been close to 30 per cent in most institutions and secured retail credit has grown at 23 per cent,” said Swaminathan Janakiraman, deputy governor of RBI, in the post monetary policy briefing in October. “If you see that in the context of the rest of the credit growth, which is in the range of 12-14 per cent, it looks to be an outlier. So, as a supervisor, it is our intention to inform the banks that this is an outlier level of growth.”
Of late, the RBI has introduced several security measures for cards such as tokenisation, where sensitive data like the card number and security code are anonymised with a unique token. Janakiraman said banks should strengthen their internal surveillance mechanisms so that any risk that might likely be building up was “handled upfront rather than coming to grief at a later time”.
In a move to check the rampant growth in consumer loans, the RBI recently raised risk weights in respect to consumer credit exposure of commercial banks, including personal loans, by 25 percentage points to 125 per cent. Risk weights on credit card receivables of scheduled commercial banks and NBFCs were also raised by 25 percentage points. Essentially it means banks and NBFCs have to back their retail loans with more capital.
While credit cards have their advantages, they can become debt traps if dues are not paid regularly. Banks allow users to pay credit card dues every cycle fully or partially. The interest rate on credit card overdue is steep—2.5 per cent to 3.5 per cent a month. Also, the interest is charged on the outstanding balance as well as subsequent purchases once the interest free period lapses.