India’s banks are becoming increasingly selective in handing out credit cards as default risks grow in the unsecured loan market. Recent data shows that the number of new credit cards issued in September has dropped sharply, as banks reassess their exposure to non-repaid credit card debt. Here’s a closer look at why banks are holding back and how rising defaults are impacting credit card distribution in India.
Decline in New Credit Card Issuances
The latest data from the Reserve Bank of India (RBI) reveals a noticeable drop in new credit card distribution. Banks issued approximately 6.2 lakh new credit cards in September, compared to 9.2 lakh cards in August. This 33% drop within a single month shows that banks are re-evaluating the rate at which they distribute credit cards. Compared to the previous year, the issuance of new credit cards has fallen by 64%, bringing the total credit card base in India to around 10.6 crore.
This shift comes as banks grow more cautious due to rising risks in the unsecured loan segment, which includes credit cards. Experts say that with default rates climbing, banks are becoming careful, potentially reducing credit card distribution further in the coming months.
Rising Credit Card Defaults: A Key Concern
A primary reason behind this shift in approach is the rise in defaults. Macquarie Capital reports suggest that default rates on credit card payments may reach 6%—a significant increase not seen in recent years. The default spike is particularly noticeable among younger customers, who often max out their credit limits without timely repayment. This trend is converting these accounts into non-performing assets (NPAs) for banks, impacting their overall financial stability.
As repayment struggles increase among certain customer segments, banks are finding it challenging to manage credit card debt. The default rate, in some cases, is also driven by the restricted availability of personal loans, which had previously provided an alternative repayment source for many credit card users.
A Look at Issuance Trends: Bank-Specific Data
While credit card issuance has generally slowed, some banks continue to lead in distribution. Data from IDBI Capital shows that HDFC Bank, SBI Cards, and Axis Bank issued the highest number of new cards in September. However, given the rising defaults and stricter lending rules from the RBI, even these leaders may slow their issuance pace:
- HDFC Bank: Issued around 4.3 lakh new credit cards.
- SBI Cards: Added 1.4 lakh new credit cards.
- Axis Bank: Distributed about 53,000 cards.
- ICICI Bank: Issued only 4,000 cards, reflecting a more conservative approach.
Analysts suggest that banks are likely to issue fewer cards in the future to control potential risks and maintain a healthier portfolio.
The Impact of Rising Defaults on Credit Card Spending
The cautious approach of banks in distributing new credit cards is not solely driven by default rates but also by changes in spending patterns. According to RBI data, credit card transaction growth slowed to 0.5% in September from 1.6% in August. While festive spending temporarily boosted overall card usage in September—resulting in a rise in total card spends from ₹1.69 lakh crore in August to ₹1.77 lakh crore—long-term spending trends may vary as card issuances slow.
This reduction in new cards could impact consumer spending and limit the growth seen in the credit card sector. Banks are concerned that reduced repayment options for customers may lead to higher unpaid balances, posing additional financial risks.
Why Banks Are Becoming More Cautious
Banks have reason to be wary of the unsecured loan market, especially as the risks around repayment grow. Key factors behind this cautious stance include:
- Increase in NPAs: Higher default rates mean that more credit card accounts are turning into NPAs, which requires banks to set aside funds to cover potential losses.
- RBI’s Tightening Rules: The Reserve Bank of India has increased scrutiny on credit card issuances, enforcing stricter rules to manage risk. This includes tighter guidelines on eligibility criteria and creditworthiness assessments.
- Consumer Spending Habits: Younger generations are more likely to leverage credit cards for everyday expenses, often leading to high balances and increased risk of default.
Adapting to a Changing Credit Card Market
As banks continue to adjust their credit card distribution policies, customers may find it harder to secure new credit cards. However, this trend could also encourage more responsible credit usage, as customers become aware of the stricter eligibility criteria and potential consequences of missed payments.
For current credit cardholders, the key takeaway is to stay diligent with repayments to maintain a positive credit history. With more careful spending and timely payments, individuals can build a healthy financial profile, potentially making it easier to access credit in the future.
