An investment in equity markets carries a high degree of risk and needs to be carefully examined before a decision is made. In what could be India's biggest IPO this fiscal, State Bank of India (SBI), the country's largest public sector lender, has filed a draft prospectus with market regulator Security and Exchange Board of India (Sebi) to sell up to 4 percent stake in its credit card offshoot, SBI Cards and Payments Services (SBI Cards), to raise around Rs 9,600 crore through an initial public offering (IPO).
SBI Cards is the second-largest credit card issuer in the country, with 9.4 million outstanding cards as of the end of September. The 485-page draft prospectus for potential investors lists various risks and opportunities alongside financials of the firm. Here are the major risks cited in the SBI Cards draft prospectus: Due diligence of director: SBI Cards has not been able to obtain certain records of the educational qualifications of its Independent Director Dinesh Kumar Mehrotra and has relied on declarations and undertakings furnished by him for details of his profile included in this Draft Red Herring Prospectus. Cutthroat competition: Competition in credit cards is also based on merchant acceptance and the value provided to the customer by rewards programs. As competitive pressures intensify, SBI Cards could be required to expend additional resources to offer a more attractive value proposition to our cardholders, which could negatively impact the company’s profit margins. These competitive factors may also affect its ability to attract and retain cardholders, slow down our credit card receivables growth and reduce revenue growth from core business. High dependence on SBI: State Bank of India is SBI Cards’ largest customer referral partner, and the credit card company’s referral arrangements with SBI allows it to market its products and services to SBI customers by utilizing Promoter’s vast branch network. Any disruption in SBI Cards use of rights to the “SBI” brand and trademark for any reason could adversely impacts the company’s reputation, business, financial condition, results of operations and prospects. Systemic risks: SBI Cards is also exposed to the systemic risks that could create an adverse market perception about Indian financial institutions and banks and materially adversely affect its business. Also, the cost of borrowings is sensitive to interest rate fluctuations, exposing the firm to the risk of reduction in spreads, on account of volatility in interest rates. In addition, transactions with financial institutions exposes the company to various risks in the event of default by a counter party, which can impact it negatively during periods of market illiquidity. Sebi action against group firm: SEBI has initiated proceedings against SBI Funds Management Pvt ltd, one of SBI Cards group companies, in relation to certain non-compliances under securities related laws. The proceedings have been initiated pursuant to investigation by SEBI for alleged violations by SBI Funds of SEBI (Prohibition of Insider Trading) Regulations, 1992 and the SEBI (Prohibition of Insider Trading) Regulations, 2015. While, SEBI had issued show-cause notices, which have been responded to by SBI Funds, no orders have yet been passed by SEBI in relation to such show–cause notices. ALSO READ | SBI Cards IPO: 10 vital things about India’s credit card market that the draft prospectus reveals Unsecured credit: A substantial portion of SBI Cards' credit portfolio is unsupported by any collateral that could help ensure repayment, and in the event of non-payment by a cardholder of their credit card receivables. As of March 31, 2017, 2018 and 2019, and September 30, 2019, 97.3 percent, 98.2 percent, 98.7 percent and 98.5 percent, respectively, of its credit card portfolio was unsecured. Interchange fees: In India, the RBI has already implemented regulations limiting interchange fees payable on debit card transactions, and similar regulations could be extended to credit card transactions in the future. Credit card interchange fees are one of the largest components of SBI Cards total revenue from operations. Interchange fees comprised 21.1 percent and 21.9 percent of our total revenue from operations in the six months ended September 30, 2018 and 2019, respectively, and 22.5 percent in fiscal 2019, 21.5 percent in fiscal 2018 and 19.3 percent in fiscal 2017.