Monday 11th May 2020

Steep fall in consumption puts the brakes on SBI Card's business.

SBI Bank Card

India 's economy is locked out of its path of growth because its residents, co-opted indoors, are unable to spend and support it. Consumption has been hit hard and SBI Cards and Payment Services Ltd, the second-largest credit card company in the country, are hurting.

SBI Card finds that attracting new spenders is a challenge, whereas current customers are unable to swipe their cards enough to boost the growth of the company's sales. The stand-alone card issuer said it added 851,000 new March quarter accounts, down 10.9 percent from the previous year.

"The lockdown has had a significant effect on sourcing and sales as malls, transportation hubs, and other commercial areas are shut down," said Hardayal Prasad, SBI Card Managing Director and Chief Executive Officer, in an interview. On average, sales agents used to bring in almost half of SBI Card's new business by hawking credit cards at shopping malls, airports and other business areas. The share price is down from the problem price by 26 percent. SBI Card is definitely not the only one that is seeing growth dropping. HDFC Bank, the largest issuer of credit cards, announced a decline in outstanding credit cards for the March period. This shows card repayments that have surpassed card expenses, which is odd considering the number of users who get by paying just the minimum balance due and not the maximum outstanding amount.

Bank of America analysts expect an industry-wide 4 percent decrease in card spending for FY21. But in the case of banks where credit card risk is just a small slice of an immense portfolio, SBI Card is a stand-alone non-bank financing company in the payment industry that has no other income source.

Average spending per card has also fallen apart from slower on-boarding of new customers. Due to the lockdown imposed since March 25 to curb the spread of COVID-19, they were down 11 percent in the March row, the company's results showed. Quarantined Indians are unable to spend as the lockout (now 55 days long) has halted access to all but important items. Note that travel, entertainment, and leisure, which are the biggest expenditures, are virtually gone. Also e-commerce purchases reflect a fraction of what was before the pandemic.

While the lockdown for SBI Card meant a big loss of growth, the challenge for them was to figure out how behaviors can change after the pandemic. Will Indians adopt, out of fear, some austerity? Would it change socially the way Indians fly, entertain, and mingle? Prasad also grapples with these issues on the SBI Ticket. Though the company had previously planned out best and worst-case scenarios, it refused to provide any guidance.

"I have no idea the severity of the virus outbreak or the duration of the lockout. We're not going to be able to make forward-looking predictions, "Prasad said in an analyst call on Friday. He claims that consumption habits are about to change. While big-ticket consumption such as travel and leisure will take a long time to hit rates seen before the pandemic, more Indians can be convinced to use plastic to pay energy bills, in department stores, and even in healthcare.

But this is a difficult game to play on scale. During the crisis, the competition gets intense and Indians are now spoiled for choice in digital payments.

SBI Card has, meanwhile, set aside some 489 crores as provisions for risks arising from COVID-19. This weighed down the company's net income for the March quarter by 66 percent.

A silver lining is that in March only 10 percent of total active accounts opted for the moratorium. Because of COVID-19, Reserve Bank of India (RBI) had allowed banks and other finance firms to give borrowers a three-month repayment holiday. A quarter of those who opted for a moratorium in April have started repaying their outstanding, Prasad said. That should give investors comfort on the side of the delinquencies.

SBI Card wants its customers to spend huge sums to stage a turnaround for its creditors. Needless to mention, the Indian economy needs consumer comeback too.