IDFC First Bank is charging 9% annual interest on revolving credit for those with good track records. How will you be able to fund credit card customers at such low yields compared to some of your peers?
In India, credit card businesses usually charge about 40% interest per annum on revolving credit which is about 3.5% per month. That has been the norm for close to 30 years now. We would charge customers rates ranging between 9% and 36% on the basis of the customer’s track record, credit score, relationship with us and internal scoring. This way we will get good quality credit customers and it will be one of the key features.
You have gone ahead with the strategy of undercutting competition quite aggressively with the kind of rates that you are offering. What is the rationale behind this?
We are not looking at either undercutting competition or even disrupting the market. We do not use these terms internally and that is how we think the market has to expand. After 25 years, India has only about 50 million credit cards. India has some like 800 or 850 million debit cards and so it is not possible that there are 600 million of them who are just not good for a credit card.
We believe this market can be dramatically expanded and there is high APR. Since the interest charged on the revolving rate is very high like 40%, we believe that if we offer rates ranging from 9% APR to 36%, the image changes and the credit card industry also gets some benefit and the market expands. We should think in terms of expansion in the market and not in terms of disruption.
The rate that you are offering to young borrowers with poor track records are about 36% — a 10-12% discount to other players?
The initial launch of this card is by invitation only and not for customers to apply to the bank, We will select the customers with whom we want to build a relationship with. Even for millennials, that is our basic thinking. We want to keep it very straight forward and there’s no fine print.
Are you not worried though about your asset quality? There may be a surge from the potentially younger borrowers that you have lent to? What is the trajectory for asset quality?
Are you meaning for the existing book or are you meaning from the credit card business point of view?
If we could talk about both but in particular, for the credit card?
I would rather stick to the credit card discussion because we are in a silent period and that is why I clarified that question. As far a credit card is concerned, we will offer credit cards to millennials and of course every income category and every age category. But like I said, even among millennials, we will be focussed on the customers. We think about this as a marathon. We are building a bank for decades and centuries not a quarter or two.
So even among millennials, we want to select the customers who meet our internal stringent credit requirements. We have to be very conscious of credit cards as far as the asset risk is concerned. But we are quite confident of managing that.
Where you are seeing the largest opportunity when it comes to sourcing customers? Would it be metro, tier-2, what is the breakup?
Right now it is going to be existing customers. By March of this year, we will probably put out close to about 200,000 cards and existing customers but eventually as a bank we are going to be in tier-1. We are going to be in tier-2, we are very much rural.
In the rural market, the number of credit cards are really nothing. It is a fraction of the number of cards and issuances. We will go there as well. We will gradually expand our business pan country, pan segments because we are a universal bank and we deal with many customers on the savings account front. We are getting a lot of customers depositing with us and we will give them cards. We think about it like an all India launch, it is not about tier-1, tier-2, tier-3.