Modifications to PPI and its impact on cards. As per unauthenticated media reports, RBI has communicated to non-bank pre-paid instrument (PPI) issuers to stop issuing cards where the funds are loaded through a credit line. There is no negative impact in our coverage universe but we disagree that it is a positive development for existing players as well. Credit cards are still in its infancy and so is payment behavior adoption. The market is large and we believe that SBI Cards is well-positioned to defend its model currently.
Clarification on loading of credit in pre-paid instruments
As per unauthenticated media reports, RBI has communicated to all "authorised non-bank prepaid instrument issuers" to not permit loading from a credit line. However, existing channels to load the pre-paid instrument through cash, debit to a bank, credit/debit cards and formats approved by regulated entities would continue. The regulation is probably coming from recent developments wherein newer business models of credit-based payment products were built by companies using PPI as a vehicle. However, RBI has raised concerns on funding of these PPI instruments through a credit line from an NBFC. Note that the regulation currently is applicable for non-bank-based PPI instruments and not PPIs that are issued by banks.
Need better formats to reach credit-linked products that help expand market
The recent move by RBI could result in innovators looking to reassess their product strategy where the regulatory environment is constantly evolving. We need more players that have different risk appetite to expand the market. Not all players may have the ability to scale up or many may have severe challenges when there is a cyclical slowdown as these business models are not well tested. However, they do build models that allow traditional lenders, usually banks, can scale up from where they have built. These companies offer innovative solutions which makes it quite valuable to improving customer experience as well. Banks bring in low cost of funds that make it easier to scale while these players have demonstrated their ability to take risk as they have a focused approach towards solving a specific problem. Traditional NBFCs built product segments which banks have scaled up once they have demonstrated the business proposition. Examples include housing finance, especially in self-employed, auto finance (CV and car finance), gold loans or even micro finance in recent years.
We are at a point where we are looking at new solutions on retail credit as penetration is quite low. There is a large share of new-to-credit or customers who are young or yet to demonstrate a credit history. We are seeing newer models by various companies where we are experimenting through BNPL or even short-term personal products. We are looking at companies that are building credit on UPI or credit cards. Given the past history, banks could probably scale many of these products at an appropriate time if they identify the opportunity.
Many reasons to be positive on credit cards; this is not the top priority
SBI Cards saw an impressive recovery on Tuesday, which partly could be attributed to the narrative from this guideline. However, we believe that the core business opportunity is quite solid even with higher competition from new players. We believe that India is witnessing a healthy transition from cash to digital, which implies that different payment products would have a role to play. In our view, we are still in the early stages of establishing a payment behavior and we believe that the credit card journey is still an attractive proposition. SBI Cards is a leading player with a healthy ~20% market share in spends and card issuance. We maintain our positive view on the stock with an unchanged Fair Value. |
