Sources Revealed NBFCs May Issue Credit Cards 

The RBI is likely to enable NBFCs issuing credit cards, turning greenlight of the rising fintech culture and BNPL practices.

• NBFC issuing credit cards: NBFCs could only distribute co-branded credit cards in collaboration with banking.
• The outcome might occur 18 years following the RBI’s July 7, 2004 circular.
• NBFCs contribute 20-30% of total credit supplied in the industry.

What’s in the news?

Owing to many high-access obstacles, particularly in the issue of regular credit cards, NBFCs have been barred from entering the credit card industry. They couldn’t even provide other types of cards, such as charge cards, debit cards, or deposited cards. However, on July 7, 2004, the RBI published a circular indicating that any firm, even non-deposit-taking companies, must meet specific eligibility requirements set by the RBI, as well as have the necessary approval and a formal agreement, in order to enter the business. One of the primary requirements was a minimal net-owned fund of Rs 100 crore. Throughout time, the specs have evolved, as have the terms and circumstances associated with this. NBFC issuing credit cards gave them an advantage to expand their business to greater extent. 

NBFC & Fintech Flourishing Their Business: NBFC Issuing Credit Cards

The consumer credit situation has changed recently, and regulators may need to review this issue. According to the survey, 44% of fintech financing in 2020 would go to various digital lending firms, indicating a bright outlook in this industry as more funds are flowing in and there has been concurrent and continuous between existing and new participants in the digital lending market.

Furthermore, with the expanding trend of purchase now, pay later (BNPL), more people are beginning to use credit cards. According to Redseer, a research organization, India’s BNPL market is expected to rise to $45-50 billion by 2026, up from $3-3.5 billion presently, due to the rising number of BNPL users in the nation.

The research also stated that digital credit cards and credit lines should indeed be permitted to operate without a license in order to increase access to financial services. In addition, joint research released last year by the government’s think tank NITI Aayog and Mastercard revealed that NBFCs contribute 20-30% of total credit supplied in the industry.

• According to the survey, digital lending companies received 44 per cent of fintech financing in 2020, and the industry has a favorable outlook with increased funding and collaboration of existing and new participants in the digital lending market.
• According to joint research produced by NITI Aayog and Mastercard, NBFCs account for 20-30% of total credit granted in the system.
• Both SBI Card and BoB Card are state-run NBFCs that may offer credit cards. 
• FinTech lenders in the BNPL market are now distributing real cards to consumers to encourage offline usage. PayU Finance, Slice, and Uni Cards have teamed up with banks to launch BNPL cards, which are basically prepaid methods of payment (PPIs) with a line of credit.
• If the RBI’s recent decision goes through, we might witness an increase in credit card financings in India. For a debt-averse country like India, credit cards have the number of credit cards far outpaced the number of debit cards. This is in contradiction to the developments in other nations, where credit cards are the dominant payment method. The RBI is currently in talks with several big NBFCs about permitting them to offer credit cards on their own.
• Under the new system, NBFC issuing credit cards will be able to originate credit cards as well as directly partner with Visa, MasterCard, or RuPay for credit card processing and transaction back office. This ensures that NBFCs retain client ownership and are not required to share it with banks.

Using the RBI Definition to Calculate Net Owned Funds

The Net Owned Funds would’ve been determined using the Company’s most recent audited balance statement. Net owned Fund will consist of paid-up equity capital, retained earnings, balance in share premium account, and capital reserves reflecting surplus originating from asset sale revenues but excluding reserves established by asset revaluation. To arrive at owned funds, subtract the cumulative loss balance and a book value of intangible resources, if any, from the total of items. In addition, holdings in shares of other NBFCs, as well as shares, debt instruments of subsidiaries and group businesses, in excess of 10% of the owned fund specified above, will be removed to arrive at the Net Owned Capital.

Conclusion

The RBI originally proposed establishing NBFCs with a specific minimum net worth in 2004, but the discussion has not progressed beyond enabling NBFC issuing credit cards,  co-branded credit cards. However, much has changed in the previous few years, with new-age Fintech firms and digital lenders significantly altering financial intermediation. In this regard, a new facility will enable NBFCs to provide a more diverse menu to consumers. Within the Indian context, the importance of NBFCs can indeed be overstated. A joint analysis by the NITI Aayog and Mastercard explicitly stated that NBFCs accounted for almost 20% to 30% of overall credit granted in the system. With the advent of digital credit cards, they have become popular in most areas. It is time to reconsider who has the right to grant credit cards. Only two NBFCs are now authorized to offer cards: SBI Cards and BOB Cards. 

Both, though, are divisions of major public sector banks. Large NBFCs such as Reliance Capital, Tata Capital, and Bajaj Finance had asked the RBI for the issuance of credit cards, citing its July 2004 circular. These players desired to issue solo credit cards on the Visa network in order to retain complete consumer control. According to the most recent RBI Bulletin, there are 6.70 crore credit cards in India, compared to 93.40 crore debit cards. This is all the more shocking given that over 55 crore Indians have a credit agency background, which should readily qualify them for credit cards. With their more flexible and decentralized network, NBFCs want to capitalize on this tremendous potential.