RBI, NBFCs in early talks to open up credit card business in India

To breathe life into 2004 circular on shadow banks' entry into this space

The credit card business in the country may be in for a major shift. The Reserve Bank of India (RBI) and a few shadow banks are said to be in exploratory talks over the possibility of allowing the latter to issue credit cards on a standalone basis in a first-of-its-kind move.

So far, non-banking financial companies (NBFCs) can only issue co-branded credit cards with banks.

This development comes 18 years after the central bank’s circular of July 7, 2004, which stated: “Any company, including a non-deposit taking company, intending to engage in this activity (credit cards) requires a Certificate of Registration, apart from specific permission to enter into this business, the pre-requisite for which is a minimum net-owned fund of Rs 100 crore; and subject to such terms and conditions as the Bank (RBI) may specify in this behalf from time to time.” The circular did not place any regulatory ban on NBFCs issuing credit cards.

Since then, the consumer credit landscape has changed, and sources say, a revisit is on the anvil.

The immediate trigger for the renewed interest in this area is that the circular of July 7, 2004, is being re-read along with the observations in the RBI’s ‘Report of the Working Group on Digital Lending through Online Platforms and Mobile Apps’, which was put for public comments in November last year.
 

This report called attention to the fact that “with an untapped base of 120 million formally employed Indians without a credit card, start-ups and venture capital firms are making a beeline for the digital lending market”. And in keeping with this trend, 44 per cent of fintech funding in 2020 went to digital lending start-ups, and with more funding and increased collaboration between established and new players in the digital lending market, “the outlook for the sector is positive”. The report added: “Digital credit cards and lines of credit should be all­owed to operate without a licence to further improve financial inclusion.”

According to the latest RBI Monthly Bulletin (January 2022), at end-November last year, there were 67 million credit cards (compared to 934 million debit cards), which is to be juxtaposed against the nearly 550-million customers who have credit bureau histories.  

Industry sources pointed out despite credit cards being around in the country for well over three nearly decades, what’s worrisome is that a shade over half the 67 million credit cards in circulation have been issued to a sub-segment of cardholders within this base. Simply put, even the most aggressive retail banks in the country are essentially carpet bombing a small pool of customers.

Additionally, a joint report by the NITI Aayog and Mastercard in May last year made a case for NBFCs’ entry into the credit card domain.

It said that NBFCs account for 20-30 per cent of the overall credit given in the system. But “NBFCs are practically constrained from the credit card market on account of high-access barriers, especially regarding the issuance of general credit cards. They are barred from issuing variants of other cards, like charge cards, debit cards, and stored-value cards”.

This report also observed: “For non-banking entities to play a stronger role in digital financial inclusion imperatives, they must be given equal footing in the system.” This was an oblique reference that regulations must be “ownership neutral”.

So far, only two NBFCs issue credit cards: SBI Cards and BoB Cards -- both of which are in the state-run space.

In the past, three leading NBFCs -- Bajaj Finance, Tata Capital, and Reliance Capital -- had approached the RBI, citing its circular of June 7, 2004, seeking a nod to issue credit cards on a standalone basis on the Visa network. This was in anticipation that the central bank may activate the said circular and open up the credit card business to NBFCs, but this did not materialise.

Globally, leading credit card issuers are banks Citibank, Bank of America and JPMorgan Chase to name a few. The leading non-bank issuers are American Express and Discover. But there is nothing in many jurisdictions that explicitly bars non-banking firms from issuing credit cards.