NBFCs To Issue Credit Cards: A Win-Win Situation

As per the RBI figures, over 1 billion cards were authorized in India in November 2018. As per statistics, only 40 million of the carrying cards are credit cards, although the bureau has 400+ million consumer credit records. Evidently, the credit card industry is vastly underserved. One of the problems is the limited universe of issuers, which now only includes banks (on the automatic route). Due to significant entry barriers, NBFCs are effectively barred from the credit card industry, both for ordinary credit cards and co-branded cards. Moreover, they are barred from issuing variations of other cards such as charge cards, debit cards, and prepaid debit cards.

This essay will first identify the obstacles that prevent NBFCs from entering the credit card market as issuers, both in general and in co-branded terms. Enabling NBFCs will have the dual benefit of deepening digital payments and making it easier for new-to-credit borrowers to establish a credit history. On the other hand, because NBFCs are subject to prudential requirements and capital adequacy regulations, allowing them to offer a revolving loan product is compatible with prudence.

Bottlenecks for NBFCs To Issue Credit Cards

On the open route, only banks may currently issue credit cards. NBFCs that want to offer credit cards must first get permission from the RBI. Furthermore, in addition to RBI clearance, the qualifying limits necessitate the appropriate NBFC method.

• The minimum Net Owned Fund (NOF)(1) required for an NBFC to apply to the RBI for credit card issuance is INR 1 billion.
• (2) The RBI may apply any additional requirements it deems appropriate.
• Furthermore, NBFCs are not permitted to issue any other sorts of cards, such as debit cards, smart cards, prepaid debit cards, or card payments.

In addition, the RBI prohibits NBFCs from issuing co-branded cards. The standards for the issuance of co-branded credit cards require the NBFC to meet the following guidelines (among others):

• An NBFC’s minimum NOF is INR 1 billion.
• According to the audited statements for the previous two years, the corporation should have produced net profits.
• Including the most recent balance sheet, the ratio of net NPAs/net advances is less below 3%.

Whereas the RBI requires prudential standards for qualifying, the RBI expected the NBFC to add its redistributive and promotional capabilities to the co-branded relationship. The credit risk was assumed by the banks.

How is it beneficial for the Lending Market?

In the absence of authorising formal seed credit, a vicious cycle might be set in motion, keeping an excluded portion potentially and forever excluded. Building credibility using a revolving credit instrument such as a credit card is one of the tactics that give a way out to such excluded people (secured against a deposit initially for instance).

Similarly, NBFCs have surpassed banks in loan deployment in recent years. They have expanded their distribution capabilities by employing technology to address previously underserved segments. NBFCs have taken advantage of banks’ reluctance to scale quickly (given their op-ex overhang and rigid policies). With INR 7.5 trillion in loans outstanding as of FY 2018, retail and MSME have been important development areas for NBFCs. 

Thus, broadening the universe of possible issuers promises that newly qualified NBFCs would pursue a distinct sector of prospectives by tailoring the product to the latter’s individual position (e.g., the secured credit card for new-to-credit customers). Because NBFCs report credit behaviour to the bureau, a continuous track record of payback raises the number of prospective clients for the official loan market in the future. This policy shift would also aid in bridging India’s low family credit-to-GDP ratio, which lags below other large nations. 

Ultimately, the RBI regulates NBFCs in terms of capital adequacy and prudential standards. In addition, they generate credit in a variety of areas, including personal loans and SME credit. As a result, allowing NBFCs to provide credit cards looks to be logical from a risk standpoint as well.

Benefits to the Digital Payments Market In Case of NBFCs to issue credit cards

The benefits to build credit history are embedded into the new-to-credit consumer’s repeated usage of credit cards. Card economics are worked out even for the differentiating adult user through incentive programmes designed by the issuer for the card user. This has a positive impact on the digital payments industry since it increases the number of active users of digital payments artefacts. Co-branded credit cards have the ability to increase loyalty/stickiness by promoting repeat usage of a certain service.

Furthermore, by allowing NBFCs to issue credit cards, rules will create a class of service providers who will be naturally interested in expanding the card acquisition infrastructure. This would help bridge India’s low PoS per million density, which is estimated to be the lowest among the BRIC countries.

Opinion

The Reserve Bank of India is on a mission to transform the Indian financial industry. It recently announced the launch of the Digital Rupee, which should be included in the Union Budget 2022. Several sources imply that the RBI is exploring the capacity of various non-banking financial corporations (NBFC) to issue solo credit cards in a first-of-its-kind action.

If approved, the new decision will replace an 18-year-old RBI circular published on July 7, 2004, which only allowed entities with a banking certificate to issue solo credit cards. However, this circular is being re-examined in light of the RBI’s findings in the ‘Report of the Workgroup on Digital Lending via Online Platforms and Mobile Apps,’ which was made available for public comment in November of last year.

According to the survey, there is a huge demand for Fintech platforms, as seen by 44 per cent of fintech financing going to digital lending businesses, the vast majority of which are NBFCs. Because the sector’s prognosis is bright, it has emphasised the necessity for such NBFCs to be permitted to offer independent credit cards without a licence. It will improve financial inclusion and make the industry more appealing to investors.

The move is great news for NBFCs and may have a beneficial impact on their share prices. If the negotiations result in the predicted outcome, stocks of the largest NBFCs, such as IIFL Finance, Aditya Birla Capital, LIC Housing Finance, and others, may rise.

Conclusion

The Reserve Bank of India (RBI) is enabling NBFCs to issue credit cards, but only those with a comprehensive portfolio will be allowed to enter the hazardous market. India has a credit-card penetration rate of 3 to 4%.

Because the capital adequacy for a company to be established as an NBFC is not extremely high, not all businesses may issue credit cards. In addition to a minimum net worth, the RBI will impose liquidity limits. As cards can be issued online, it may also investigate the IT infrastructure and cybersecurity safeguards. So yet, only two NBFCs, SBI Card and BoB Card are empowered to issue credit cards.