On January 1, a full-page advertisement in Mumbai newspapers informed readers that ICICI Bank has issued two million credit cards -- "the first bank to reach this milestone". Obviously, the term "first bank" was not used in a global context. But does this mean ICICI Bank has overtaken Citibank in the Indian credit card market?

If you ask ICICI Bank, you won't get an answer. Strangely, Citibank, too, will not give you a clear reply. Both players are confident of their own numbers but don't claim that one has overtaken the other. Of course, who has overtaken whom is anybody's guess.

This is symptomatic of the Indian credit card industry that has been growing at a 31 per cent compounded annual rate. In fact, the growth in the past three years has been higher than what the industry saw between 1990 (when Citibank issued the first credit card) and 2000.

Naturally, the growth comes with its problems. Bad loans or non-performing assets are one of them. In October 2003, the default rate was 8.75 per cent. Two years ago, it was pegged much lower at 6.5 per cent. One reason for the rise in NPAs could be the aggressiveness with which some players are distributing cards without checking customer credentials adequately.

Now, ask any individual player in the credit card business about the NPA level in its portfolio. Be it Citi, ICICI Bank, Standard Chartered or anybody else, the answer is: "Our NPA level is three to four percentage points below the industry level." If that's the case, which player has the maximum NPAs? Again, mum's the word. The players are ready to talk about only their portfolio, not others'.

However, it must be said that under no stretch of imagination can current NPA levels be termed alarming. This is because the Rs 12,000-crore (Rs 120 billion) credit card portfolio of the banking sector is a minuscule portion of the industry's over-Rs 7.5 lakh crore outstanding loan book.

But the players are too shy to talk about several things: from the total spend by credit card customers to the percentage of rollover of credit (on which the banks earn interest) to the actual amount of NPAs in individual banks' portfolios. They tend to hide more than they reveal.

Why? Before answering this, take a look at the industry figures. The total number of credit cards in force in India was between 8.75 and 9 million in December last year. But that does not mean that there are 9 million card holders, because in urban India, particularly in major cities, multiple cards usage is a way of life. By a liberal estimate, the actual number of card holders could be around 5 million. This is against the 22 million mobile telephone subscribers, 50 million cable connections and 250 million bank account holders.

How does this compare with the Asia-Pacific card market? The Visa and MasterCard data available for 2002 shows that Japan has 1.12 billion cards, followed by China (1.1 billion) and South Korea (64 million). However, these numbers are inclusive of credit and debit cards. In India, the comparable number in 2002 was 12.86 million. Now, it could be around 24 million as debit cards have overtaken credit cards. What's more, ATM cards are also being converted into debit cards by most banks.

How are individual players positioned in the credit card space in India? Both Citi and ICICI Bank claim to be number one with a card base of over 2 million. State Bank of India has a card base of around 1.4 million. Standard Chartered Bank may have a slight edge over SBI with a 1.5 million card base, while HSBC issued around 700,000 cards. These five collectively account for about 71 per cent of the market. Among the rest, HDFC Bank, the latest entrant, has acquired a card base of over 400,000 and ABN-Amro, around 300,000.

The aggressive players are adopting a two-pronged approach: increasing the customer base and treading new zones by expanding the coverage area beyond metros and big towns. ICICI Bank has taken its product to 67 cities, SBI Cards is present in over 40 cities and HDFC Bank plans to cover 25 cities soon. Among the foreign banks, Standard Chartered is present in 18 cities and Citibank, 30 cities.

Another strategy is to launch more and more co-branded cards. For instance, ICICI Bank has six co-branded cards and eight affinity cards. HDFC Bank and SBI Cards have two co-branded cards each and Citibank has 29 co-branded and affinity cards. Public sector oil companies, mobile telephone players, retail chains and even airlines are joining hands with banks to float co-branded cards.

Despite this, the total card spend is only around Rs 12,000 crore (Rs 120 billion). On an average, a credit card holder spends between Rs 1,500 and Rs 2,000 on a card in one month. (On this issue too, individual banks claim the spend by their customers is much higher than the industry average.)

And remember, banks do not earn interest on the total spend. Interest is earned only when a customer rolls over the credit (that is, he chooses to pay only the minimum amount required to carry forward the credit). At best, 25 to 30 per cent of the total credit is rolled over.

Overall, about 0.6 per cent of personal consumption expenditure in India is through credit cards. This means that for every Rs 100 spent on consumption, only 60 paise is routed through credit cards. The comparable figure in the US is 16 per cent. The Asia-Pacific region also shows higher usage of credit cards in terms of PCE.

One way of increasing the credit card use could be by making all utility payments through cards. One can use credit cards for paying petrol bills, mobile phone bills, insurance premiums, airline and railway tickets, besides other consumer goods. But there are many other payments that cannot be made through credit cards even now. For instance, school tuition fees, water tax and other municipal taxes, electricity bills and fees for doctors and clinics, although some hospitals have now started accepting cards.

At least two state governments in south India have initiated steps to make all utility payments through cards. Chandrababu Naidu has started a concept -- e-seva -- in Andhra Pradesh, that ensures all utility bill payments at one point through cards. Kerala has launched a project called "Friends" that works on the same model. Incidentally, the southern states are far ahead of the rest of India in the use of credit cards. Bangalore, for instance, sees more credit card use than Mumbai.

How can the players increase credit card usage? One way could be increasing the distribution of terminals. Now, there are less than a lakh electronic data capture terminals used by merchant establishments that accept credit cards. These terminals, which process credit and debit card payments, are put up by the card-issuing banks. HDFC Bank has set up about 27,000 EDC terminals, ICICI Bank about 25,000 and Citibank about 24,000.

An imported EDC terminal costs between Rs 18,000 and Rs 25,000, depending on the bulk of the order. The cost has come down from Rs 32,000 over the past year because banks are aggressively placing orders for them.

However, the Hyderabad-based Linkwell Telesystems has recently started manufacturing these terminals and brought down the cost to less than Rs 10,000. This will help increase the number of terminals manifold. The banks can now afford to put up EDC terminals even in provision stores as the break-even point for these terminals has come down to less than Rs 50,000 worth of transactions a day from Rs 100,000.

The convergence in the telecom sector, with greater use of mobile telephones and the Internet, will bring down the transaction cost further. Some players have already tied up with CDMA operators and replaced the landlines of EDC terminals to bring down processing costs.

The government too can do its bit by waiving the tax on credit cards -- a big disincentive for card users. Currently, an 8 per cent service tax is imposed on credit card transactions. Some countries in Asia-Pacific actually offer tax incentives to encourage credit card use. This is to bring down cash transactions and bring in at least a part of the parallel economy into the mainstream economy.

Once the volume of business transacted through credit cards grows and consumers start rolling over a higher percentage of credit instead of clearing the bill instantly, banks will be in a position to cut interest rates on credit cards, provided NPA levels are kept low.

To bring down the default rate, banks must set up a credit bureau. A credit bureau exists, but it only provides data identifying defaulters so that banks are in a position to stop entertaining customers written off by other players.

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