Table of Contents
Introduction
India is currently the fifth-largest economy in the world, having grown steadily and sustainably over the last ten years. Even with all of this information, the Indian economy still struggles, particularly in comparison to its peers, to close the credit inclusivity gap.
The banking and financial systems in India are attempting to close this credit gap by trying new things and introducing initiatives that might allow them to access untapped markets within the country’s economic hierarchy.
The formal credit sector was initially limited to financial products like personal, vehicle, and home loans. However, banks are now concentrating on products like credit cards, BNPLs, and credit EMIs, which are intended primarily for low-income segments of the Indian economy.
India’s Credit Landscape
India has historically been a debit card market, but over the past ten years, the market has shifted from debit to credit cards, reversing the previous story. As previously noted, financial institutions offer a wide range of audience-specific services that contribute to this growth.
The credit card issuance rate has grown at a compound annual growth rate of 20% over the previous four years, and in 2019, the growth rate of transactions reached 26%. These numbers support the shift that the Indian credit market is going through and point to opportunities for unrealized potential that could propel the country’s economic growth.
Present Summary
According to data released by the Reserve Bank of India, credit card transactions increased significantly in the first nine months of FY23 after the pandemic, rising from ₹6.30 trillion in FY21 to ₹10 trillion. This data supports the idea that the credit market is genuinely going through a transitional phase as it quickly moves from debit to credit transactions.
Numerous experts believe that after the pandemic, consumers’ increased spending habits are to blame for the rise in credit transactions.
The negative aspect of this story is that since the pandemic, consumers’ bank surplus has been decreasing, which has led to a low balance that has been linked to increased credit card use and decreased debit card use.
Now, these discussions don’t give a clearer picture of the current circumstance. To do that, we must comprehend the customer incentives provided by banks, which have been driving the credit market. First, we need to be aware of the issuers’ revenue streams:
- The interest that issuers charge customers based on the amount they have borrowed is known as interest income. Of all the revenue, 45–50% comes from this interest.
- Little fees and charges include annual fees, joining fees, and so forth.
- The amount the issuer charges for handling each transaction is known as an interchange fee, and it can make up as much as 20–30% of total revenue.
A credit card is now available for everyone, regardless of their situation: a secured credit card requires a security deposit to be made before the credit line can be used, a business credit card, a student credit card, rewards credit cards, cashback credit cards or store credit cards.
The rise in service penetration brought about by the release of new credit risk assessment models that can serve customers with or without credit scores is another factor contributing to the credit card boom.
Furthermore, the market is expected to grow as contactless payment methods like smartphones, tokens, and QR code scanning coexist.
In addition, credit EMIs—also referred to as consumer durable loans—are another type of formal credit that has experienced rapid expansion because of the growing urban population’s high income and appetite for consumption, lower bank interest rates, and the fin-tech-driven credit boom. These factors also include minimal documentation requirements for approvals, low interest rates, minimal to nonexistent processing fees, free EMIs, and no security or down payment.
In India, the credit card market is still relatively small, with only 5%–6% of consumers using them, compared to higher percentages in the USA (66%), UK (65%), Austria (58%), and Brazil (30%). Even though growth appears to be stagnating after COVID, it will eventually pick up as the strains on the economy start to lessen.
