SBI Card: Competition from personal loans a drag on interest spreads

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₹652 to ₹913, citing an expected pickup in loan growth from FY26 and an improvement in credit costs from the September quarter (Q2FY25). SBI Card shares now trade close to ₹800. Still, faster loan growth may be tough.

Card companies are facing increased competition from unsecured personal loans priced at 15-20% versus credit card interest rates on revolvers at 30%-35%. Revolvers are cardholders who carry balances over from one month to the next and pay interest on those revolving balances. Customers can choose to take a personal loan at a much lower rate to repay their expensive credit card dues if they so wish.

The share of revolvers in the receivable mix has been trending downward to 24% in Q1FY25 from 38% in Q1FY20, barring the RBI dispensation-related spike during covid-19. This could also be why the interest spread (the difference between the rate of lending and borrowing) fell to 9.6% in FY24 from 14.3% in FY20. Also read: Expiry of patent for key product weighs on PI Industries On credit costs, there is no clear indication so far that delinquencies have started trending lower.

In its Q1FY25 commentary, management pointed out that delinquencies are shifting across segments with no identifiable cohort. Accounts that performed well over the past four to five years are now becoming delinquent, and recoveries are rare. Defaults are seen across various employment types and city tiers, and appear to result from customers' inability to pay.

Thus, an immediate positive change in the next couple of quarters seems difficult. Even if SBI Card performs better than it did in Q1FY25, one cannot lose sight of the valuation. The company’s likely return on assets (RoA) of 4.2% for FY25, earned from the relatively riskier business