Credit Card Crisis Deepens: Public Sector Banks Grapple with Rising Bad Debts

The credit card sector in India is facing significant challenges, particularly for public sector banks (PSBs), as they encounter mounting bad debt issues. This problem is exacerbated by aggressive expansion strategies and competition from fintech firms, which have compelled PSBs to issue more cards to a broader demographic, including those with limited credit histories. In this article, we will delve into the challenges faced by PSBs, the impact of regulatory interventions, and the broader implications for the Indian financial sector.

Overview of PSBs' Credit Card Challenges

Public sector banks have seen a substantial increase in their credit card bad loan ratios, reaching 12.7% as of September 2024. This figure is significantly higher than the 2.1% reported by private banks during the same period, according to data from Care Ratings[1][2]. The disparity highlights the differing strategies used by PSBs and private banks in their credit card issuance. While PSBs aim to promote financial inclusion by offering credit to a wider segment of the population, private banks focus on consumers with stronger credit profiles.

Major Challenges Facing PSBs

• Aggressive Distribution of Credit Cards: The period between September 2021 and October 2023 was marked by intense competition from fintech firms, which led PSBs to aggressively distribute credit cards[1][2]. This expansion was designed to tap into the post-pandemic boom in consumer spending.

• Limited Credit Histories: PSBs often extend credit to individuals with limited credit histories, increasing the risk of defaults. This differentiation in customer bases contributes to the higher bad loan ratios compared to private banks[1][2].

• Regulatory Crackdown: The Reserve Bank of India (RBI) has implemented stricter regulations on unsecured lending, affecting the ability of customers to roll over debts, particularly in the sub-Rs 50,000 category[1][2]. This has further complicated the situation for PSBs.

Rising Credit Card Dues in India

As of January 24, 2025, the total outstanding credit card dues in India stood at Rs 2.9 lakh crore, marking a 13% year-on-year increase[1][2]. This surge reflects the growing reliance on credit for consumer spending, a trend that has been encouraged by the pandemic-induced economic recovery.

Key Players and Their Performance

• SBI Cards: As the second-largest credit card issuer in India, SBI Cards reported a gross credit cost of 9.4% by December 2024, with a gross non-performing asset (NPA) ratio of 3.2%[1][2].

• BoB Cards: Bank of Baroda's credit card arm, BoB Cards, showed an improvement in its bad loan situation, with a gross bad loan plus write-off ratio decreasing to 6.8% by December 2024, down from 9.6% in March 2024[1][2].

Impact of Regulatory Actions

The RBI has taken several steps to stabilize the unsecured lending landscape:

• Increased Risk Weights: In November 2023, the RBI increased risk weights on consumer credit and loans to non-banking finance companies (NBFCs) to mitigate risks associated with unsecured lending[1][2].

• Crackdown on Fintechs: Early in 2024, the RBI tightened norms for co-branded credit cards, requiring fintech issuers to clearly display the names of their banking partners. This move aimed to enhance transparency and accountability in the sector[1][2].

Global Comparisons and Trends

Globally, the rise in credit card defaults is not unique to India. In the U.S., for instance, serious credit card delinquency rates (90+ days past due) are projected to increase to 2.76% in 2025, marking a fifth consecutive year of growth, albeit at a slower pace[3]. Meanwhile, Americans defaulted on $59 billion in credit card debt in 2024, a significant jump from the previous year[4].

Key Global Trends:

• Higher Defaults: Increased cost of living and high interest rates have led to more defaults globally.
• Slowing Growth: After several years of rapid growth, credit card balance increases are expected to moderate as economic conditions stabilize[3][5].

Conclusion

The credit card sector in India, particularly for public sector banks, faces significant challenges due to bad debts. Efforts to promote financial inclusion have resulted in higher delinquency rates compared to private banks. Regulatory actions are underway to stabilize the sector, but experts warn that the worst may not be over yet. Understanding these dynamics is crucial for policymakers, financial institutions, and consumers alike to navigate the evolving landscape of credit card lending.

As the economic environment continues to shift, it will be important to monitor how these trends unfold and how they impact both PSBs and the broader Indian economy. The ongoing challenges highlight the need for balanced strategies that promote financial inclusion while managing risk effectively.

Recommendations for PSBs and Regulators

Strategies for PSBs:

• Risk Management: Implement more robust credit evaluation processes to reduce defaults.
• Diversification: Expand customer bases beyond lower ticket-size cards, focusing on more stable consumers.
• Collaboration: Engage with fintech firms to leverage innovative technologies while adhering to regulatory guidelines.

Regulatory Considerations:

• Oversight: Regularly review and refine regulations to ensure they are effective in managing risk without stifling innovation.
• Support for Consumers: Introduce policies that protect consumers from excessive interest rates and poorly managed debt.

By adopting these strategies, India can foster a healthier credit ecosystem that supports economic growth while minimizing the risks associated with unsecured lending.