Plastic in the form of credit cards, that is.
The Business Standard reported on Tuesday that in India, “the annual growth in credit card balances has fallen to an all-time low”:
According to the Reserve bank of India (RBI) data, year-on-year growth for credit card outstandings, or the total balance due to issuers on credit card spends by customers, has plummeted to 1.4 per cent as on May 22, 2009. During the year to May 23, 2008, the growth rate was 36.5 per cent. And, for the preceding year, it was 45 per cent.
This flat growth comes despite an increase in rollover of credit from around 60 per cent a year ago to around 65 per cent now.
This is interesting for several reasons.
First, it suggests that Rosenberg’s “frugal consumer” meme might have global – rather than merely North American – resonance. The head of credit cards at HDFC Bank told the Indian daily that “card holders have also resorted to lower spends on their cards due to the uncertain economic environment.”
Second – as the Business Standard story makes clear – it’s not just US banks that are simultaneously cutting back on the credit they extend to consumers and re-considering the credit card business model:
Apart from whittling down their existing card base, some of the most aggressive players have slowed new issuances too.
For instance, ICICI Bank, which has the largest credit card base in the country, has slashed the number of new credit cards to about 1,000 a month, according to a senior executive who declined to be named. Questions are also being raised about the financial viability of this product in its current form. “This category is going to be ring-fenced for some time and we are examining if it is sustainable without an annual fee,” the bank’s executive said.
And is the case elsewhere, delinquencies are rising, at 20 per cent currently compared with 15 per cent about a year ago, the Business Standard said. Last month, Fitch said losses on US credit cards had breached 10 per cent, in line with an earlier assessment by Moody’s; meanwhile, lenders in Europe are bracing themselves for a wave of defaults.
Finally, if this behaviour is replicated throughout the BRICS, consumers’ reluctance to spend spend spend (at least on plastic) could undermine Visa and MasterCard‘s plans to achieve continued growth through overseas markets.
As Reuters reported on Tuesday (emphasis FT Alphaville’s):
Visa Inc and MasterCard Inc, the world’s largest credit card networks, are counting on foreign markets for the growth that recession-bound U.S. consumers have been unable to provide.
Overseas markets have contributed to the bottom line at both Visa and MasterCard with double digit revenue growth rates in recent years, helped by a shift among consumers worldwide to using plastic where they once used cash and checks.
But foreign markets became truly crucial last year — sustaining the revenue and earnings of both firms, despite a steep decline in credit card use in the United States — still by far the largest market for both companies.
In comparison, emerging countries from Mexico to South Korea — and even economies such as Japan and Germany that are developed, but are underpenetrated by credit and debit cards — could become the engines of growth ahead.
…
Brazil, Russia, China, India, Mexico and South Korea seem to be the most appealing emerging markets for growth, given their size, growing middle class and underdeveloped electronic payment network.
“In China and India there is half a card per person, while in the United States there is something close to 5 cards per person, so you can see the difference in penetration; plus the number of people make China and India big opportunities of growth,” said David Koning, an analyst at Robert Baird.
Consider, however, reports like this one on consumer spending in Russia:
The Russian market has not been impacted as much as the foreign markets, but the impact is certainly being felt in terms of the consumer spending reducing, consumers moving towards lower-end brands, buying down as well as consumers moving towards cheaper stores where they can get discounts.
And on South Korea, which the Economist described as “an exception to the rule of Asian prudence”:
Its households’ debt amounts to 150% of disposable income, even higher than in America. The banking system, which borrowed heavily abroad to finance a surge in domestic lending has also been badly hit by the global credit crunch, making it harder for firms to finance investment.
Moreover, consumer spending in South Korea fell at an annualised rate of 18 per cent in the fourth quarter of 2008, the Economist said.
As for China, 24/7 Wall St had this to say:
The Chinese government may find that the most troublesome factor in keeping its GDP growing at a rate of over 7% is its inability to find work for people who made their livings off of the country’s export economy. The notion that liquidity-driven consumer spending will help China while the rest of the world emerges from a downturn only works if there are a lot of consumers to stimulate.
In Mexico, economic conditions don’t portend unbridled consumer spending, either. The country’s economy is expected to shrink more than 6 per cent this year – in what would be the most severe contraction since the Great Depression.
And it will take much more than unbezahlbar advertising to convince the Germans to lever up.
Related links:
Yes Meredith, we know you’re worried about credit cards – FT Alphaville
Sorry sir, your credit-card has been rejected due to insufficient lender’s funds – FT Alphaville
Unsecured, insecurity in the UK – FT Alphaville