More Indian NBFCs should get into Credit Card Issuance Business.

Non-Banking Financial Corporations (NBFCs) play a crucial role in the Indian financial system by?catering to the diverse credit needs of various sectors of the economy. Their ability to provide customized financial products and services tailored to the specific needs of different segments of society makes them a vital component of the financial system.

Non-Banking Financial Corporations (NBFCs) now distributes the credit cards of banks, they have tie-ups with, instead of issuing their own credit cards. As of now only two public sector banks associated NBFCs; State Bank of India Cards and Bank of Baroda Cards are offering credit cards in the market. To process and handle transactions and back offices for these credit cards, the NBFCs will be permitted to directly partner with Visa, MasterCard, or RuPay under the new system. The Reserve Bank of India (RBI) on 21st April 2022 has issued a Master Direction for Credit & Debit Card – Issuance and Conduct Directions, 2022 guidelines it has opened the doors for non-banking finance companies to enter the credit cards space,?Bajaj Finance?may be the first to seek the regulator's go-ahead to commence this new line of business. Punjab National Bank also some time back tried to apply for NBFC for the credit card issuance but declined by RBI that time. Hopefully, Punjab National Bank would be moving the application now.

NBFCs can currently issue credit cards, but they can only do so as co-branded cards with banks. Going by its circular on the master direction on card issuance, the RBI is inclined to permit non-banking financial corporations (NBFCs) in the credit card market.

There are several reasons credit under-penetration in India. One of the main issues is that a sizeable portion of the population, especially in rural areas, lacks financial literacy. The various financial services and products that are available to them are frequently unknown, as well as how to access them. An initiative popularly known as the JAM Trinity, which was created specifically to address the issue of financial inclusion, government decided to push for digital initiatives, extensive use of technology to improve the governance of government responsibilities. The letters JAM stand for Jan Dhan accounts, Aadhaar, the country of India's Unique Identification System that issues official identification documents to its citizens, and M stands for mobile. A digital infrastructure was built with these three as its pillars, allowing for the cashless transfer of funds to and from the intended beneficiaries.

Overall, credit card issuance can be a strategic move for large NBFCs in India, providing them with an additional source of revenue, customer acquisition opportunities, cross-selling opportunities, brand building, and valuable data analytics. Large NBFCs like Mahindra Finance in India should consider getting into credit card issuance for the following reasons:

1. Diversification of Revenue Streams: For big NBFCs, issuing credit cards can be an extra source of income. They can lessen their reliance on any one specific good or service by diversifying their sources of income.
2. Customer Acquisition: For NBFCs, issuing credit cards may be a successful strategy for gaining new clients. A very high degree of consumer demand exists for credit cards, which are a well-liked financial instrument. This could aid NBFCs in growing their customer base and market share.
3. Cross-selling Possibilities: Credit card issuing can also present NBFCs with cross-selling Possibilities. Customers with credit cards frequently have interest in other financial goods and services, such as loans and insurance. NBFCs might utilise credit cards to advertise to clients about their additional goods and services.
4. Brand Building: The issuing of credit cards might aid in NBFCs' brand development. Customers who use credit cards, a conspicuous financial instrument, can serve as marketing ambassadors for the NBFC. This may aid NBFCs in enhancing their standing and gaining more market recognition.
5. Data analytics: Credit card issuance can give NBFCs access to useful data analytics. Data about credit card usage can be used to learn more about client preferences and behaviour. NBFCs can use this information to better adapt their goods and services to the needs of their clients.
6. Overall, credit card issuance can be a strategic move for large NBFCs in India, providing them with an additional source of revenue, customer acquisition opportunities, cross-selling opportunities, brand building, and valuable data analytics.

The RBI on 21st April 2022 has issued a Master Direction for Credit & Debit Card – Issuance and Conduct Directions, 2022 guidelines for Banks, UCBs and NBFCs who wish to obtain a credit card license. These guidelines are specifically designed to ensure that NBFCs that issue credit cards operate in a safe and sound manner and comply with all applicable regulations. These guidelines will be effective from July 1, 2022, the RBI said, adding that the guidelines apply to all the banks excluding payment banks, state co-operative banks, and district central co-operative banks. Apart from the banks, NBFCs which have been permitted by RBI to issue credit cards, will also have to follow the central bank’s guidelines. Some of the key guidelines for NBFCs that wish to obtain a credit card license from RBI include:

1. Minimum Net worth Requirements: In a move that opens the door for NBFCs to issue credit cards, the RBI set a Rs 100-crore net worth requirement for finance companies issuing cards. NBFCs that wish to obtain a credit card license.
2. Eligibility Criteria: NBFCs that wish to obtain a credit card license must have a minimum credit rating of BBB+ or equivalent from a recognized rating agency.
3. Management Experience: The management of the NBFC must have adequate experience in the field of consumer finance, credit cards, or other related fields.
4. Risk Management: The NBFC must have a robust risk management system in place to identify, measure, and manage various risks associated with credit card issuance.
5. Technology Infrastructure: The NBFC must have a robust technology infrastructure in place to support credit card issuance and management, including data security and privacy.
6. Customer Protection: The NBFC must have appropriate policies and procedures in place to protect the interests of its credit card customers, including the handling of customer complaints and grievances.
7. Compliance: The NBFC must comply with all applicable regulations, including those related to anti-money laundering, know your customer, and fair lending practices.

To further expand the reach of formal credit to the masses, the RBI Governor on April 6th, 2023, announced the Monetary Policy Committee's decision to expand the scope of Unified Payments Interface (UP)I by permitting operation of pre-sanctioned credit lines at banks through the UPI. The RBI Governor Shaktikanta Das on 21st September launched the RuPay credit card on UPI network. The National Payments Corporation of India (NPCI) introduced a new feature linking RuPay Credit Cards to the UPI interface on 20th September 2022.

These two decisions by RBI & NPCI would allow UPI to combine credit card, buy-now, pay-later, digital line of credit, lending applications, and payment functions. The only prerequisite for the participant bank to take advantage of UPI's wide range of prospects. On the top of above, the possible to use UPI is to settle international remittance and send money across borders. We at PayOpt is quite confident that combining UPI with existing bank credit lines would foster innovation. It certainly has the potential to spark numerous creative inventions.

In addition, the cost of credit and cost of card issuance and most expensive proposition is acceptance of credit cards on the merchant network due to expensive POS network, in India it is high compared to other countries, which can deter some people from taking out credit card or loans. This is partly due to the high level of risk in the Indian market, as well as the relatively high cost of capital for banks and other financial institutions.

But recent decision by RBI & NPCI will bring down the cost of credit operations, ease of payment acceptance at merchant network with QR code network, real time decisioning for the line of credit or credit cards. NBFCs can leverage on the decision, which enable financial institutions to ride on the UPI rails to offer credit cards and digital line of credit to increase the income of the marginalized bottom of the pyramid population and expand the bottom line of the financial institutions. The government of India has launched several initiatives aimed at promoting financial inclusion and increasing access to credit. These include the Pradhan Mantri Jan Dhan Yojana, which aims to provide access to basic banking services to all households in India, and the MUDRA scheme, which provides loans to small and micro enterprises. All these schemes are going to benefitted with linking of Credit Cards and Digital Line of Credit to UPI. On the top of these initiatives, it will enable NBFCs who are better placed to offer credit to the customer in a cost-effective manner, as the market for?credit card?growth remains untapped even as the?credit?bureau has more than 400 million customer records while around 40 million?credit cards?have been issued so far.

The RBI also granted special authorisation for NBFCs to issue credit cards. However, because the credit card industry is both expensive and lucrative, NBFCs thinking about joining this market must first re-evaluate their business models, technological stacks, and alliances. NBFCs?diversifying into?credit cards?and other forms of?credit?would do well to evaluate their technology stacks and partner with Financial Institutions.

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