#47 Which is a better business?

A profitable credit card business vs a questionable small finance bank.

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Who’s a Profitable Credit Card Customer?

On a recent conference call with analysts, Executive Director of ICICI Bank, Anup Bagchi, answered a question on credit cards.

Here’s what Anup had to say:

  • They look at credit cards from two angles:

    1. From a brand building point-of-view: As credit cards are one of the few high frequency products offered by a bank, each time it is used, the brand is reinforced. So even though it is technically an asset (loan) for the bank, ICICI looks at it like a liability (deposit) as it can increase customer stickiness.

    2. From a profitability perspective: ICICI Bank likes episodic revolvers rather than chronic revolvers.

In order to understand the second point, let us see the different types of credit card customers.

Here’s the break-up from RBL Bank, which provides the most transparent data on their credit card customers.

  1. Transactor: These are customers who pay their bills on time, avoiding interest charges! They mostly use credit cards for ease of “transactional” purposes.

  2. Revolver: There are always some who fail to pay their balances in part of full, thus “revolving” them over one or several months.

  3. Term: Ever take an EMI plan on a credit card? You agree to pay the instalments over a specific “term”, say, six or nine months.

By now, you’d realise that transactors do not make much money for the banks. Term makes them a little bit more, through processing fees and interest charges, in the range of 15%-17% p.a. (even no-cost EMIs have hidden charges). Revolvers are the most profitable segment - with interest charges as high as 45% p.a.

From HDFC Bank’s website, “HDFC Bank Credit Card interest rates range up to 3.4% per month. But the interest rate may be adjusted based on your relationship with the bank and the usage of the card.”

Term customers offer lower profits but more stability. That is why RBL has a high share of them (and I am expecting most other large banks have a similar borrower profile). Revolvers are highly unstable. So when ICICI mentioned that it liked “episodic” revolvers, it meant customers who revolve from time to time. Compare this with the riskier “chronic” revolvers, who keep revolving every month and can suddenly turn into a bad loan customer when things don’t go as per their plan. Even though chronic revolvers are more profitable, a bank needs to spend more resources monitoring them closely.

Thus, running a credit card business is more of an art than science.

Which type of customer are you?

Leave a comment

What’s up with RBI?

Thankfully, RBI hasn’t been too busy with their updates while I was absent.

Here’s the most important ones over the last few weeks:


In English: Special Long-Term Repo Operations (SLTRO) for Small Finance Banks (SFBs). Essentially, RBI is allowing SFBs to tap into low-cost funds at repo rate (4%), worth ₹10,000 crores to be valid for three years. The hope is that these SFBs would eventually loan this amount to small business units, MSMEs and other unorganised sectors adversely affected during the current wave of the pandemic.

But how can the RBI make sure the funds go to the desired place?

One way is by tweaking the current regulations to include MFIs (micro-finance industries), one of the worst affected, as a part of “Priority Sector Lending (PSL)”. Once a segment is classified as PSL, banks cannot avoid lending to them. An additional condition is that these MFIs have to less than ₹500 crore in size, in terms of their gross loan portfolio. Else, all the money would’ve gone to the safer, bigger players.

But who will save the SFBs themselves?

Barring one or two exceptions, all SFBs themselves have a micro-finance origin (Refer deep-dive on SFBs). Since this category of banks is new, most of them haven’t had the time to diversify yet - resulting in a core micro finance portfolio.

As I’ve explained before, micro-finance is a very tricky sector. These are small borrowers who are the first to get affected by the pandemic. If you add lockdowns, bank agents have an added difficulty in collecting payments. (Example, for Ujjivan SFB, collection efficiency dropped from 94% in March to 88% in April).

Diversification is key not only in terms of loan portfolio, but also geography. Imagine you’re a bank which is only operating in states which have announced full lockdowns - double misery!

An article by The Ken, from where the above image has been referenced, points out how small finance banks have a similar low exposure as other big banks when it comes to having branches in semi-urban and rural areas - areas where they should ideally double down upon (I’ve pointed this out earlier as well).

Why do they do this?

Mostly in the quest for profitable customers on the liabilities (think deposits) side. While RBI has mandated these niche banks to serve low-income borrowers, it did not solve for the liability issue. Low-income borrowers do not save, period! So where will these banks get the money to lend? Thus, they try to entice savers in big cities with high deposit rates. (Hint: Find out which bank has tied up with today’s sponsor)

Let us hope RBI makes their life easier sooner than they did for Payment Banks.

Daily Payments Data

RBI now publishes daily data for several payment systems such as UPI, NEFT, RTGS, NACH and card data. You can access it here. (Bookmark this link!)

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