India credit card market overview by Sutherland Global Services

Indian Credit Card Market Overview November 2013

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Indian Credit Card Market Overview Indian Credit Card Market Overview • Credit card market in India is among the least penetrated markets globally. There are less than 20 Mn credit cards in circulation, which represents a penetration rate of less than 2% among the country’s 1.2 Bn population • Adoption of credit cards is on the rise in India, and customers are getting increasingly comfortable with paying by credit cards – Spending through credit cards continued to increase in the past five years. It rose 29% to INR 124,393 crore in 2012-13 from INR 96,613 crore in the previous fiscal • The increased usage of credit cards by customers has attracted the attention of bankers towards expanding their credit card portfolio. Also, banks are more comfortable in handling electronic payments since there is no physical cash transfer involved • Banks attribute the rise primarily to a payment innovation termed 'EMI at POS', which enables manufacturers and retailers to sell smartphones and consumer durables under monthly installment schemes without the former taking any credit risk or the buyer bearing any interest cost • However, the majority of the credit card business is still concentrated among the top lenders. Barring SBI, the largest public sector bank in India, private and foreign banks are the largest credit card issuers

• Compared to 2008, card companies today are in a much better position to extend credit. There has been a drastic fall in willful defaults as customers are realizing the importance of maintaining a healthy credit record. Secondly, banks are now extending credit cards largely to their own customer base, to reduce defaults

Source: Sutherland Research

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India is underpenetrated in credit card ownership when benchmarked with global peers Credit Card Penetration

Top Credit Card Issuers by Outstanding Cards, 2012 (Mn)

Adults with a Credit Card (%)

China

73.0

China India

55.6

42.1

36.0

50.9

62%

Brazil Pakistan

90.2

29%

Industrial and China Merchants Commercial Bank Bank of China (ICBC)

China Construction Bank (CCB)

J.P. Morgan Chase

Bank of America

Citigroup

Russia

India

10% 6.5

Bangladesh

Nigeria

2.8

Japan

64%

Mexico

64%

HDFC Bank Ltd.

ICICI Bank Ltd.

2.5

State Bank of India

2.3

Citibank

1.3

1.1

Standard Chartered Bank

Axis Bank Ltd.

Source: Relbank, World Bank

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With less than 20 Mn credit cards in circulation, penetration of credit cards in India stands at 1.7% Outstanding Credit Cards Credit Card Base (Mn) 28

25 20

FY 10

FY 11

FY 12

15 10

5 0 FY 02

FY 03

FY 04

FY 05

FY 06

Market Share by Credit Cards Issued FY 2012 28%

FY 2013

17%

25%

55% Public

Total: 17.7 Mn

18%

57% Private

Foreign

Total: 19.6 Mn

FY 07

FY 08

FY 09

FY 13

Commentary • Credit card segment in India witnessed growth in FY 2013 after four years of sluggishness. Although it is still far from the peak of 2008, there has been an uptick in issuance from both private and public issuers • Private sector banks remain the largest issuers, accounting for more than half (57%) of the credit card base – With a market share of 25%, foreign banks have been slower than domestic banks in issuing credit cards, which has led to a slight erosion in their market share over the previous year (28% in FY12) – HDFC Bank continues to be the largest credit cards issuer with a 33% market share, followed by ICICI Bank with 15% and SBI Cards and Citibank with 13% each

Source: RBI; Sutherland Research

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Foreign banks score better than Private and Public banks in terms of amount transacted per transaction Number of Credit Card Transactions* (FY 2013)

Cards in Mn

Public Sector Banks 16%

Private Sector Banks 48%

Total no of Transactions at (ATM + POS): 399.2 Mn

Amount of Credit Card Transactions* (FY 2013) Public Sector Banks 12%

40 35 30 25 20 15 10 5 0

3,573.6 3,116.7

3,063.5 2,264.8

19.6 11.1 5.0

3.5

Public Sector Private Sector Foreign Banks Banks Banks

4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

Overall

Amount per Transaction (INR)

Foreign Banks 36%

Cards Issued vs Amount Transacted Per Transaction

Commentary • In FY 2013, an amount of INR 1,244 Bn was transacted through 399 Mn credit card transactions. This resulted into an average credit card transaction amount of INR 3,116 • Foreign banks have a 36% share in the total credit card transactions, and their share in total amount transacted is slightly higher at 41%. Whereas public sector banks perform poorly in this category

Foreign Banks 41% Private Sector Banks 47%

Amount of Transactions at (ATM + POS): INR 1244.3 Bn

• The cross-sell ratio of credit cards in the private bank domain is close to 75% (HDFC Bank for FY 2013). Private banks including HDFC and ICICI Bank continued to focus on selling credit cards to their existing customers with prior banking relationship

• The cross-sell ratio of credit cards in the public sector segment is very high, i.e. c.100% for almost all banks, except for SBI and Bank of Baroda, who have a separate card business unit setup

Source: RBI; Sutherland Research

* ATM and POS

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HDFC and ICICI jointly control almost half of the Indian credit card market Outstanding Credit Cards by Issuer and Launch Date No. of Outstanding Credit Cards FY 2013

Early entry does not guarantee a higher market share in the Indian credit card market

1.3

Citibank

Launch: 1990

2.8

2.5

2.3

Standard Chartered Bank

Launch: 1992

6.5

1.1

SBI Cards

Launch: 1998

Axis Bank Ltd.

Launch: 1999

ICICI Bank Ltd.

HDFC Bank Ltd.

Launch: 2000

Launch: 2001

Source: RBI; Sutherland Research

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Latest Trends in The Indian Credit Card Market

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Security enhancement, rural focus and third-party collaboration are the major focus areas Upgraded Technology for Enhanced Security Banks are increasingly using advance technology to make usage of credit cards more secured • ICICI Bank Limited announced the launch of its next-generation credit card – ICICI Bank Carbon, developed in partnership with Visa. – ICICI Bank Carbon enables card members to instantly generate a highly secure dynamic passcode on the card. The card plastic incorporates an alpha-numeric LCD screen, a 12-button touch keypad and an in-built battery to generate dynamic one-time passcodes • SBI Card launched credit cards with the EMV (Euro Pay, MasterCard &Visa) chip security feature – SBI Card was the first credit card company in India to migrate to the high security EMV platform Outsourcing and JV Many Indian banks are entering into a JV or outsourcing their overall credit card business to develop a separate and dedicated business unit that will promote only the bank’s credit card business • Jammu & Kashmir Bank has an agreement with Venture Infotek Global Pvt. Ltd. Mumbai, now M/s ATOS world line, to outsource its credit card business activities including debit card, credit card issuance management functions and merchant acquiring point of sale management functions • SBI Card also operates through a JV between SBI and GE Capital founded in 1998, to sell credit cards Credit Cards Gaining Prominence in Rural India Realizing the importance of rural population, banks have started to focus on this underserved market • On an incremental basis, nearly 25% of HDFC Bank’s credit cards are now sourced from rural and semi-urban markets even as 40% of Indian population is believed to be in want of a bank account. The bank has also started setting up point-of-sale (POS) terminals across merchant establishments in these geographies to encourage customers to use credit cards • ICICI Bank’s rural banking strategy includes providing a range of asset products like kisan credit cards to help farmers in purchase of cattle and irrigation equipment

Source: Sutherland Research

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Not all foreign banks had a successful stint in the Indian credit card market Growing cases of foreign banks exiting the credit card business In recent years, several foreign banks have exited their credit card operations in India. RBS, Deutsche and Barclays were prominent among the foreign banks who sold their credit card operations in the country. – Ratnakar Bank acquired RBS India’s credit cards business – Standard Chartered Bank and Kotak Mahindra Bank acquired Barclays Bank's credit card portfolio – IndusInd Bank acquired the credit card business of Deutsche Bank’s Indian operations

Source: Sutherland Research

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Overall Performance

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Unlike the decline in the number of cards issued, spending through credit cards continued to increase in the past five years With a penetration rate of about 1.7% in an overall population of over 1.2 Bn, the credit card market in India is one of the most underdeveloped in comparison to all major developed and developing markets. However, banks in India have recently increased their credit card issuance for the first time since the financial crisis started five years go in 2008

• • • •

According to Reserve Bank of India (RBI) data, card issuance by banks and financial institution grew by 11% to 19.6 Mn in 2012-13. From its peak of 27.55 Mn cards in 2007-08, card issuance had fallen to 17.65 Mn in 2011-12 Despite the sluggish economy, both private and public sector banks are growing their credit card business cautiously through their existing bank customers Existing credit cardholders appear to be less affected by the financial crisis as credit card spending continued to grow rapidly during the same period, albeit from a still very small base Unlike the decline in the number of cards issued, spending through credit cards continued to increase in the past five years. It rose 29% to INR 124,393 crore in 2012-13 from INR 96,613 crore in the previous fiscal

Private Banks Make Up 57% of the Indian Credit Card Market • Private sector banks remain the largest issuers, accounting for more than half (57%) of the credit card base • With a market share of 25%, foreign banks have been slower than domestic banks in issuing credit cards, which has led to a slight erosion in their market share over the previous year (28% in FY12) • HDFC Bank continues to be the largest credit card issuer with a 33% market share, followed by ICICI Bank with 15% and SBI Cards and Citibank with 13% each Bank Types

Cards Issued – FY 2013

Card Issued – FY 2012

3,475,963

3,063,450

Private Banks

11,125,397

Foreign Banks

Public Sector Banks

Total

Total Additions

Growth Rate

Market Share – FY 2013

412,513

13.5%

25%

9,666,704

1,458,693

15.1%

57%

4,952,937

4,923,664

29,273

0.6%

18%

19,554,297

17,653,818

1,900,479

10.8%

100%

Source: Sutherland Research

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Private and Public sector credit card issuers are gaining market share at the expense of foreign players At an overall level, most of the growth in the credit card business for FY 2012-13, i.e. the increase in issuance of credit cards in India, was contributed by the growth in the private banks and public sector banks For FY 2012-13, Private banks hosted about a y-o-y growth of 15.1% • Kotak Mahindra Bank and Axis Bank hosted the highest growth of 61.7% and 41.3%, respectively • However, HDFC Bank, the largest issuer of credit cards in India, added the highest number of cards (about 0.95 Mn) during the period and promoted its growth of 17.0% • ICICI Bank added close to 21.5 thousand cards, registering minimal growth of 0.8% during the period • According to industry estimates, the cross-sell ratio of credit cards in the private bank domain is close to 75% (HDFC Bank for 2012-13). Most of the private banks including HDFC Bank and ICICI Bank continued to focus on selling credit cards to their existing customers with prior banking relationship. This focus came into existence post the 2008-09 global crisis, where delinquency rates increased significantly Public sector banks contributed the second highest growth of 13.5% annually. SBI Card was the highest contributor in the pie • SBI Card, which dominates around 75% of the credit card market in the public sector domain, added 0.35 Mn cards with an annual growth of 15.6% • SBI Card was followed by Punjab National Bank and BOB Cards in terms of the number of cards added during the period. However, Indian Overseas Bank and Indian Bank contributed the second and the third highest growth in terms of the number of cards issued, with 27.8% and 19.9%, respectively • The cross-sell ratio of credit cards in the public sector bank segment is very high, i.e. close to 100% for almost all banks, except for SBI and Bank of Baroda, who have a separate card business unit. Public sector banks in India prefer to sell credit cards to only their existing customers. They do not make any effort to market their product to outsiders Foreign banks are not doing well as they were only able to host a minimal y-o-y growth of 0.6% • Foreign banks including RBS and HSBC witnessed a decline in issuance of credit cards with a 34.5% and 32.2% decrease in business, respectively • However, to balance the overall numbers toward the positive node, Standard Chartered Bank registered an excellent growth of 22.7%, followed by minimal performance growth from American Express and Citibank at 3.2% and 2.6%, respectively Source: Sutherland Research

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