Diminishing returns: Credit card providers are trimming benefits; here's what cardholders should do

Dining at airports can be a seriously pricey affair. A simple vada pav—that costs around Rs 50 in an average outlet outside an airport—could potentially be found being sold at five times that price at Rs 250 inside airports. If you decide to get it on the plane, the expenses multiply further. Smelling an opportunity, credit card providers were offering complimentary lounge access with some of their cards, making them more appealing for cardholders. For a nominal fee of just Rs 1, cardholders could access and enjoy the luxurious buffet available in lounges across airports. This perk has swiftly become one of the most sought-after privileges associated with credit cards after the surge in air-travel post the Covid-19 pandemic.

However, the situation is in a flux now. Long queues for entry into airport lounges is a common sight at almost all major airports today. And even if you manage to get inside, securing a comfortable table requires another massive stroke of luck. The surge in post-pandemic travel has unexpectedly heightened the demand for this perk, surpassing the lounge demand from the pre-Covid-19 era.

This heightened demand has consequently resulted in increased expenses for credit card providers, as they pay for the lounge access of cardholders on their behalf. But the announcement by the banking regulator Reserve Bank of India of an increase in the risk weight of unsecured loans and credit cards might further accelerate the rethink among credit card issuers about the perks they provide. And lounge access has become one of the most in-demand privileges to be restricted, apart from other revisions in the perks and eligibility criteria of credit cards. “Credit card providers had already started cutting down on lounge access around 2-3 months back. To quote some numbers, the cost of providing lounge access used to be 0.10 per cent of the total product cost till some time ago. That has now increased to 0.25 per cent,” says Gurjot Singh, Co-founder of fintech retail debt collections firm Collekto.

Several credit card providers such as HDFC Bank, SBI Card and Axis Bank have recently reduced their lounge benefits. For instance, HDFC Bank Regalia Credit cardholders need to spend a minimum of Rs 1 lakh in a calendar quarter to avail of lounge benefits, starting from December 1, 2023. Similarly, Cashback SBI Card does not offer complimentary lounge access anymore, eliminating the earlier benefit of complimentary lounge access four times each year. “We have rationalised lounge access for the first time in the last couple of years. For some airports, it is very costly, and it’s not feasible to offer it to all the customers. During the Covid-19 period, it wasn’t used; it’s only now that we are witnessing a surge in travel,” says Sanjeev Moghe, President and Head of Cards & Payments at Axis Bank.

Apart from lounge access, credit card companies are also curtailing other benefits available with the cards. Axis Bank has revised the terms of its Magnus Credit Card from September 1, 2023. In addition to losing its 25,000 points monthly milestone benefit, the annual fee for the card has been increased to Rs 12,500, from Rs 10,000 earlier.

Cost and Pressure

The depreciation in rewards and benefits available on credit cards is primarily linked to the economic conditions post Covid-19, notably inflation. With the rising cost of goods and services, experts say that credit card companies have been forced to re-evaluate the sustainability of their rewards programmes. “In this day and age, credit card firms and their business partners are faced with several challenges, all of which boil down to running the business sustainably. These challenges range from meeting customer demands in the face of inflation to tough competition, and the need to improve margins,” says Adhil Shetty, CEO of BankBazaar.com. “As digital payments grow rapidly, and more and more Indians become eligible for a credit line, credit card firms will need to reassess their rewards programmes, among other things, to ensure sustainable growth,” he adds.

Data from BankBazaar shows that credit card numbers are rising rapidly in the country, with the total number of credit cards in existence having jumped nearly 4.8x in the past nine years to more than 94.7 million as of October 2023, from 19.6 million in 2014. As RBI, credit card expenditure was also at a historic high of Rs 1.78 lakh crore in October, a 25 per cent surge from the previous month.

Another reason for the reduction in benefits is the decreasing revolver rate for the industry. With credit card users classified into three categories—transactors, who pay off their balances promptly; revolvers who carry overdue balance to the next month and accrue interest on the outstanding amount, and EMI users—experts say that revolvers are typically the most profitable cardholders for issuers. They add that there is also a growing practice among individuals, of opting for personal loans to settle their credit card balances. But paying their higher-interest-incurring credit card dues with low interest rate personal loans has contributed to the reduction of margins for credit card providers as they miss out on the interest they would have otherwise earned. An example is SBI Card’s revolver rate that has dropped to 24 per cent in Q2FY24, from 34 per cent in Q2FY21.

“The low revolver rate has been offset by the high number of equated monthly instalments (EMI) on credit cards. Many of these are interest subventions, where the interest is borne not by the customer, but by the vendor or manufacturer. These have translated into discounts for customers, but they have not impacted the revenues of credit card issuers,” explains Shetty. For example, SBI Card’s interest earning receivables from EMIs has increased to 38 per cent in Q2FY24, from 35 per cent in Q2FY23.

Payments and Pain

While credit card transactions have increased 30 per cent year-on-year in FY23, per a PwC report, credit card defaults have also jumped by 30.5 per cent to Rs 4,073 crore in FY23, from Rs 3,122 crore in FY22, per data from RBI. “These numbers are for the early buckets of 0-30 days and vary from company to company. However, when it comes to the top three credit card companies—HDFC Bank, ICICI Bank and SBI Card—and the rest of the pile, there is a significant difference in portfolio quality,” says Collekto’s Singh. “Hence, if you want to compare bounce percentages, you must segregate it as per specific metrics rather than a generic overall portfolio,” he adds, further explaining that since credit card providers are looking to expand aggressively across geographies, customer segments and income buckets, delinquency levels may rise.

Consider this: Balance-level serious delinquencies, measured as 90 dpd (days past due), has improved across product categories, except for credit cards and personal loans, according to the TransUnion CIBIL Credit Market Indicator (CMI) report for the quarter ending June 2023. It is at 1.63 per cent for credit cards, and 0.84 per cent for personal loans for the quarter ended June 2023, up 0.17 and 0.4 per cent, respectively, compared to the same quarter in the previous year.

“Our cost of funds (CoF) have been stable at 7.1 per cent versus the previous quarter. We benefitted from the increased long-term borrowings that took place in the previous two quarters, limiting our re-pricing risk this quarter,” said Abhijit Chakravorty, MD & CEO of SBI Card, in an investor call. “However, with the short-term rates again experiencing volatility, we expect CoF for the next few quarters to be marginally higher. The yield is marginally lower in the quarter owing to a larger share of short-term interest-bearing term receivables in the overall IBNEA (interest bearing net earning assets),” he added.

Regulatory diktat

The rise in unsecured lending and the slight increase in defaults have led the country’s central bank to take corrective action by increasing the risk weight for credit card receivables and personal loans. Per its notification, the risk weight on credit card receivables has been increased by 25 per cent, considering that commercial banks currently attract a risk weight of 125 per cent, while NBFCs attract a risk weight of 100 per cent.

The increase in risk weightage by the RBI means that credit card companies now have to set aside more capital. Earlier, for every Rs 100 in credit card receivables, the risk weight was 125 per cent—that is Rs 125. After the increase to 150 per cent, the risk weight becomes 150 per cent of Rs 100—that is Rs 150. Hence, assuming a capital adequacy ratio (CAR) of 9 per cent, the bank would now need to set aside Rs 13.50, at 9 per cent of Rs 150 compared with Rs 11.25, at 9 per cent of Rs 125. Consequently, the increase in capital requirement for lenders and card providers is (Rs 13.50-11.25), which comes to Rs 2.25 for every Rs 100 in credit card receivables, or 20 per cent.

“This means that banks and credit card providers have to put aside more funds, reducing the amount they can lend. This would have an impact on the rewards, and we may see them rationalised further,” says Shetty. “However, it is important to remember that the risk weights on credit cards were at this rate much before Covid-19, and once the high interest cycle begins to reset in a couple of quarters, a number of those rewards would come back,” he adds.

But are more devaluations in the offing in the short term? “Yes,” says Colleckto’s Singh, adding that with the increase in the CoF, card providers will have to make the rewards more premium. Effectively, the thresholds to avail perks might increase. For example, the monthly/quarterly spend thresholds for certain benefits, like lounge visits, reward points conversion multiple, etc., would be higher. “The point is, if card issuers have to maintain their margins and now that their CoF is also going up, they’ll have to cut back on something else. Now, that can be reward points, lounge access, etc.,” he adds.

Hence it is important for cardholders to stay informed about such devaluations. When a card is devalued, users should check if the updated features are suited to their spending habits. If not, they can look at other options that provide them better value. “While taking other cards into consideration, it is important to ensure that the chosen card not only aligns with your spending habits, but also offers value-back that is higher than the devalued card,” says Rohit Chhibbar, Head of Credit Cards Business at digital loan and credit cards platform Paisabazaar.

All said and done, one thing is certain; the long and winding queues at airport lounge gates are surely going to shorten in the near future.

@Teena_Kaushal