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India's biggest private lender gets credit card reprieve; digital still in limbo

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India's biggest private lender gets credit card reprieve; digital still in limbo

HDFC Bank Ltd. is confident it can reverse the slide in its credit cards business after the nation's central bank lifted an eight-month freeze on acquiring new customers. But the nation's biggest private-sector lender still has some convincing to do before it is allowed to launch any new digital initiatives.

HDFC Bank aims to add 500,000 new credit cards per month from February 2022 to "regain its market share and cement its leadership position," according to an Aug. 23 press release. The bank will launch new co-branded cards with pharmaceutical, travel, consumer goods, hospitality and telecommunications companies, it said.

"We are confident of meeting the needs of our customers and come back with a bang," said Parag Rao, the bank's group head for payments, consumer finance and digital banking.

HDFC Bank, the biggest issuer of credit cards in India, saw its market share fall after the Reserve Bank of India, or RBI, in December 2020 ordered a halt to new digital business activities and the sale of new credit cards following a series of outages in the company's internet banking platforms. Though it has remained the biggest credit card issuer in India with a market share of about 24%, the lender lost nearly 559,000 customers following the ban, reducing its total customer base to 14.8 million as of June, according to RBI data.

Its peers added 2.7 million new accounts in the period. Rival private-sector lender ICICI Bank Ltd. added 1.3 million new credit card customers and SBI Cards and Payment Services Ltd., a unit of State Bank of India, issued almost 749,000 new cards between December and June, the data shows.

HDFC Bank will likely get "aggressive" in signing new credit card customers after being out of the market for nearly nine months, said Nitin Aggarwal, a research analyst at Motilal Oswal Financial Services, an Indian brokerage. "The card business is a highly profitable business for the bank ... as the growth in this segment picks up, we expect [the bank's] margins and net interest income to gradually recover," Aggarwal said.

Credit cards make between 25% and 33% of the bank's total fee income, and that may improve with the lifting of the restrictions, Aggarwal said.

Partial reprieve

The central bank's decision to partially lift the restrictions a few weeks before the Indian festive season will help HDFC Bank return its credit cards business to growth. But the restrictions on digital business generating activities will continue until further review by the RBI, the bank said in an announcement Aug. 18. "We will continue to engage with RBI and ensure compliance on all parameters," HDFC Bank said.

"Indian banks have historically underinvested in technology. The recent uptake in digital payments has slammed the banks' already creaking infrastructure, causing frequent outages and stalling of digital transactions," said Sampath Sharma Nariyanuri, a financial technology analyst at S&P Global Market Intelligence.

Indian banks rely more on their offline channels to grow their lending as digital and mobile payments do not yield the kind of margins that banks can earn via credit cards and other offline channels. But the sudden shift in consumer behavior during the coronavirus pandemic caused a surge in internet and mobile banking and strained the banks' information technology infrastructure.

Banks have little incentive to enhance their digital payments capacity as the central bank's waiver of merchant fees on online payments has created an unfavorable pricing structure, Nariyanuri said. On credit cards, banks earn about 1.53% of the transaction value on average as their share from the fees charged to the merchant.

The key issue at HDFC Bank has been at the back end and data centers, partly due to inadequate capacity and choice of data centers, Jefferies said in a note on Aug. 18. The lender "may need to enhance investment, in its IT capacities and recent plans to hire over 4,000 staff for IT platforms is a good move," Jefferies said, adding, "we understand that these issues can be resolved and RBI might like to get greater comfort before lifting current restrictions."

HDFC Bank also announced a partnership with Paytm, India's biggest digital payments platform. HDFC Bank will drive merchant partnerships to use Paytm's point of sales payments and the two companies will launch a co-branded product for the retail segment that the online payments company can offer to its customers.

Paytm is operated by One97 Communications Ltd., which is planning to launch India's biggest IPO to raise $2.23 billion within this year.

"This brings together two market leaders who will drive innovative digital solutions for financial transformation in the country by combining their strengths in the banking, lending and digital payments space," according to a joint press release on Aug. 23.