SBI Cards IPO: Is The Frenzy Justified?

The upcoming initial public offering of SBI Cards and Payment Services Pvt. Ltd. is creating a near frenzy. Investors are salivating, analysts are raving about it, while State Bank of India and the Carlyle Group are preparing to rake in over Rs 9,000 crore from the issue.

The issue will remain open from March 2 to March 5. Shares will be offered in a price band of Rs 750-755, SBI said on Tuesday. The IPO includes a fresh equity issue of Rs 500 crore and an offer for sale of 130.5 million shares. Based on the price band, the IPO size would be over Rs 10,000 crore.

The euphoria around the SBI Cards IPO emerges from a few stand-out features of the company and its business. In the near to medium term, those features will be the reason that SBI Cards commands lofty valuations. In the long run, some of those very features could prove to be limiting for the payment unit of India’s largest bank.

One-Of-A-Kind Advantage

SBI Cards, while inherently a payments service provider, is actually registered as a non-bank financial company with the Reserve Bank of India.

It is rare in this regard because the RBI currently does not allow NBFCs to offer their own credit cards. Non-bank lenders like Bajaj Finance have to issue cards in partnership with a bank. In a recent interview with BlooombergQuint, Sanjiv Bajaj, managing director of Bajaj FInserv made a pitch in favour of NBFCs issuing cards directly, terming the current structure as “licence raj”.

SBI Cards and a handful of others like Bank of Baroda’s BoB Cards (now known as BoB Financial Services) managed to beat that licence raj simply by virtue of vintage.

SBI Cards was started as a joint venture in 1998. When the credit card business started to grow and the RBI placed restrictions, SBI was allowed the benefit of grandfathering.

So you now have a company which gets half its income from interest costs and the remaining half from fee. The NBFC in SBI Cards earns the interest income, the payments service provider earns from the fee.

Yes, the same holds true for credit card units of banks but for them the cards business gets blended into the bank’s overall business.

Growth Versus Risk

Beyond the advantage handed to it by its business model, lies the potential of the credit card business.

Much has been said about the possible and likely growth of the credit card franchise in India. Suresh Ganapathy of Macquarie Research sums it up well: “India’s credit card industry offers vast room for growth, with <5 percent cards per capita, <1 percent of banking system loans and <7 percent of non-cash spends. Loss rates in this business are sub 5 percent and as per CIBIL the yields that they get are closer to 30 percent implying that the business has become very lucrative.”

The risk of future defaults is tough to measure. Bankers and analysts cite the presence of credit bureaus to argue that another blowout like the one Indian banks saw after the global financial crisis will not take place again. It’s possible. But let’s be honest, we won’t really know till we face a situation where the economy faces large scale job losses.

Should we face a spike in defaults, SBI Cards will be a little more vulnerable than others. There are two reasons for this. One, it is what is known as a monoline business. This essentially means it has no other business lines which can act as a buffer in a time of elevated credit card defaults.

Second, SBI Cards, unlike other banks which turned cautious post the 2008-09 experience, still issues a large number of cards to customers who don’t bank with SBI. “SBI Cards is the largest open market issuer of credit cards in India with 60 percent of its cards base from the open market. This structurally leads to a different business model than banks, which focus on captive savings deposit flows for filtering customers and deciding credit limits,” said Gautam Chhugani and Monika Agarwal of Bernstein in their report dated Jan. 20, 2020.

Third, SBI Card’s customer base is more dispersed. SBI Cards has focused more on growth from smaller towns and younger millennials and the share of premium cards in its portfolio has declined from 15.7 percent to 14.2 percent, Chhugani and Agarwal pointed out.

Risks In Changing Regulation, Evolving Technology

It would also be unwise for investors in a payments business to ignore two other risks. That of changing regulations and rapidly evolving technology.

As mentioned above, NBFCs have been clamoring to issue credit cards directly. It’s not just Sanjiv Bajaj who has made that suggestion. The Payments Council of India, too, has been seeking the entry of NBFCs into the business.

While the RBI has so far not yielded, the regulator is more focused than ever before on digital payments. Should it selectively allow NBFCs to issue credit cards, the advantage that SBI Cards holds today may diminish. Other regulatory changes such as reduction in merchant discount rates to make digital payments more accessible could also hurt the business.

Equally, it would be foolish to think that technology can’t disrupt credit cards. The Unified Payment Interface has seen exponential growth in adoption, hitting pre-existing business models like wallets. If a credit facility linked to UPI comes into play, it could give credit cards a run for their money.

Novelty Value

None of this means that SBI Cards won’t have a bumper public issue.

Analysts are churning out reams on the potential of credit cards in India. Investors want a piece of what is currently a unique, differentiated and lucrative business.

How long that excitement around SBI Cards and the credit card business will hold is a separate question.

Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.