Hi everyone,

Welcome to the 68th edition of The Pattern, a weekly newsletter where we unpack the latest from the worlds of finance, technology, and the economy.

Let’s jump right in! 

Recent data released by the Reserve Bank of India (RBI) shows that credit card spending hit an all new high of INR 1.4 trillion in May 2023.  The total number of credit cards in force also increased to 87.4 million in the same month from 86.5 million in April yet another first. The first two months of the financial year saw the addition of nearly 2 million cards.

While conservatives may baulk at the idea of making purchases on credit, there are, seemingly, several benefits to increased credit card spending. Very simply:

• Card transactions are ‘above board’ and leave an audit trail, reducing the number of unreported transactions and boosting tax collections

• It facilitates faster and cheaper purchases and better distribution of products and services 

• Increasing credit card usage increases spending and GDP

All seems well then - credit card spending has doubled since the pandemic, and FinTechs are driving these new consumption patterns with innovative credit products and exceptional customer service.

However - and there’s always a however - the RBI isn’t getting ahead of itself.  Credit cards are, after all, a form of unsecured lending which could ultimately weaken the economy.

I don’t always mean to be all about the doom and gloom. After all, we are in the business of credit and we’re all for promoting healthy borrowing behaviour. In this piece from last year, our CEO Rajat Deshpande wrote about buy now, pay later in particular, and spoke of its convenience, while also urging consumer education and discretion.

The same discretion, I would argue, must be used in case of credit card spends.  Indian credit card holders owed their banks  INR 2 trillion in dues by April - this huge amount on an unsecured lending tool can burden banks.

The bigger concern? In the first nine months of FY23,  non-performing assets  (NPAs) in banks’ credit card segment jumped by INR 765 crore, or 24.5%, to INR 3,887 crore. And just last month, credit card defaults surged further.

Some did see this coming. In April this year, Aparna Ramchandra, Founder-Director, Rectifycredit.com spoke to the Economic Times  and stated that while credit card spending is itself positive, what is ‘scary’ is that people are failing to pay their dues. All indications point to a major bubble burst, she added.

As the cost of living only goes higher, it’s not a stretch to assume that credit card spends will continue to rise - and banks need to remain alert. A combination of consumer awareness, solid risk assessment, and strong collection practices can ensure that the economy only experiences the upside of this spending.

That's all from me for now - as always, leaving you with some interesting reads and numbers!

Between the digits

• USD 3 bn: The  bailout  amount for Pakistan as approved by the IMF

• 3.48%: Wholesale price index based  inflation  in May

• 50%: Women's workforce representation, according to  HerKey

• USD 20.13 bn: India's  merchandise trade deficit  in June

  Reading list:

  
  

• A credit card bubble is brewing but no one wants to talk about it

• Housing.com partners with FinBox to offer instant personal loans up to Rs 10 lakh

• Are Indian banks ready to adopt the expected credit loss framework?

• Apple eyes credit card launch in India as partnership with Goldman may be nearing its end

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter  here  and follow  FinBox on LinkedIn  to never miss any updates.  

Cheers,

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.