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India has been on the path of constant and sustainable economic growth for the past decade and is currently the 5th largest economy. Despite all these facts, another aspect of the Indian economy is its inability to fill the credit inclusivity gap, especially when compared to its contemporaries.
Illustration by The Geostrata
India’s banking and financial systems are working on bridging this credit gap by experimenting and launching various projects with the potential to tap into the untouched segments of the Indian economic hierarchy.
Initially, the formal credit sector was restricted to financial products such as home, auto, and personal loans, but the banks have now shifted their focus onto instruments like credit cards, BNPL, and credit EMIs, which have a specific target audience of low-income groups within the Indian economy.
INDIA'S CREDIT HISTORY
Primarily, India has been a debit card-dominant market, but the transition from a debit to a credit card market in the last decade has reversed the aforementioned narrative. This growth is further fueled by the numerous and audience-specific services provided by financial institutions, as mentioned above.
In the last 4 years, the credit card issuance rate has registered a compound annual growth rate of 20%, with the transaction growth rate at 26% in 2019. These figures corroborate a transition that the Indian credit market is undergoing and also signifies prospects of untapped potential, which can drive the growth story of the Indian economy.
CURRENT PROSPECTS
Recent Reserve Bank of India’s recent data shows a significant hike in Credit Card transactions from ₹6.30 trillion in FY21 to ₹10 trillion in the first 9 months of FY23 post-pandemic. This data emboldens the fact that the credit market indeed is under a transition period, making a shift from debit to credit transactions rapidly.
Several experts feel that the rise in credit transactions is owed to increased consumer spending habits after the pandemic.
However, the downside of this story is the fact that the surplus that the consumers had saved in their banks has been falling since the pandemic struck, resulting in a low balance that was associated with low usage of debit cards and more usage of credit cards.
Now, these arguments do not paint a clearer picture of the situation at hand. For that, we need to understand the incentives that the banks offer to consumers, which have been fueling the credit market. Firstly, we must take note of the revenue streams of the issuers:
Interest income is the interest that issuers charge consumers depending upon the amount that they have borrowed. This interest makes up 45–50% of all revenue generated.
Fees and charges are minor charges like joining fees, annual charges, etc.
An interchange fee is the amount charged by the issuer for processing every transaction, amounting to up to 20–30% of all revenue generated.
Today, there is a credit card for people from all walks of life, be it a business credit card, student credit card, rewards credit card, cashback credit card, secured credit card(accompanied by a security deposit deposited before availing the credit line), or store credit card.
Another aspect of the credit card surge is the increased penetration of services with the introduction of new credit risk assessment models that can cater to consumers with or without any credit score.
Moreover, as contactless payment methods via smartphones, tokens, and scanning of QR codes get along, the market is set to exponentiate.
Furthermore, credit EMIs, also known as consumer durable loans, are yet another category of formal credit that has registered significant growth due to an increasingly urban population with high consumption appetite and income, lower interest rates from the banks, and a credit boom spearheaded by fin-techs, which are accompanied by minimum documentation requirements for approvals, low-interest rates, a low to almost negligible processing fee, no-cost EMIs, and no security or down payment.
The credit card market in India is still under-penetrated at around 5%–6% when compared to countries like the USA (66%), United Kingdom (65%), Austria (58%) and Brazil (30%). Even though the growth seems stagnant post-Covid but will eventually cope as the economic strains tend to ease.
BY DIGVIJAY SINGH
TEAM GEOSTRATA