In today's Finshots we talk about the new regulations surrounding NBFCs and credit cards

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The Story

Do the spammy SMSs hawking personal loans annoy you?

Well, maybe you’ll have to deal with some more. And this time they’ll have just one goal — convincing you to get a shiny new credit card.

In a circular published recently, the RBI opened the doors for non-banking financial institutions (NBFCs) like Bajaj Finance to issue credit cards. The only caveat? They’ll have to seek permission before venturing down this road.

At this point some of you will probably go — “Wait a minute! I already have a Bajaj Finance credit card. What’s this new gimmick?”

Well, what you have is a co-branded card. For instance, Bajaj Finance has partnered with RBL bank and they’ve already issued over 2.59 million credit cards this way. However, within this arrangement, RBL bank extends the credit line and Bajaj Finance takes care of distribution and marketing. They get to make some money, but it’s really not the same as issuing their own credit cards.

Does this mean the likes of Slice and Uni could also start issuing their own credit cards? Well, if they own an NBFC, they can. However, right now, these companies don’t issue credit cards. Instead, they deal with something called prepaid instruments (PPI) and oftentimes the credit limit is capped at figures as low as ₹60,000. Once again, there’s a bank powering all of this. However, with the new regulations, there’s nothing stopping these entities from going their own separate way and issuing credit cards, assuming they hold an NBFC license and that all-important permission from the Reserve Bank of India.

And there's a good reason why NBFCs are excited about this. Credit card companies make a lot of money. There’s the annual fee, late payment charge, exorbitant interest rates, and the list goes on. Take for instance, the credit cards division of SBI. The company’s profits soared from ₹284 crores in the financial year 2016 to ₹1245 in FY20 (right before the pandemic kicked in). That’s nearly a 35% annualised growth!

Also, there are only 3 credit cards for every 100 people in India. Compare this to emerging markets like Indonesia (7%), China at over 42%, and Brazil with over 73%, you can see that India is still a nascent market.

The only problem? RBI’s circular on the matter isn’t the first. In fact, they did something very similar back in 2004. In it, they wrote — “NBFCs are not allowed to undertake credit card business without prior approval of Reserve Bank of India”

And rumour has it that the likes of Tata Capital and Bajaj Finance have tried to convince the RBI in the past. However, those results haven't borne fruit. The only two non-banks that have been allowed to issue their own credit cards happen to be SBI Cards and BoB Cards. Both subsidiaries of big public sector banks. So it’s all within the family really.

And that means we have to ask — Why will this time be any different?

Well, for one, the 2004 notice was a curt 10 liner. This time around, it’s much more fleshed out and covers a whole host of other factors as well.

Also, the RBI has spelt out stricter guidelines for co-branding. It says, and we quote: “The co-branded credit/debit card shall explicitly indicate that the card has been issued under a co-branding arrangement. The co-branding partner shall not advertise/market the co-branded card as its own product. In all marketing/advertising material, the name of the card-issuer shall be clearly shown. The co-branded card shall prominently bear the branding of the card-issuer.”

So if they’re tightening the noose around co-branded credit cards, perhaps they’ll make more leeway for NBFCs to issue their own. Finally, there’s speculation that the regulator is now holding NBFCs to a higher standard. They want these entities to be better regulated, like the banks. So maybe they’re willing to extend some of the benefits too.

Bottom line — Don’t be surprised if you start seeing more credit card promo material out there. The regulations have changed.

Until then...

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