Did Citibank do something wrong? Back in 1990 it stole a march on its competitors and became the first bank to launch a credit card in India. Fourteen years later, Citibank has 2.14 million credit card users on its rolls and more card-carrying middle-class Indians are signing on every day.

Should Citibank be proud of its pioneering role and its steady performance in the credit card business? The answer is a qualified yes. Certainly, Citi has much to be proud about. But take a look at the blistering speed at which Indian public sector and private banks are growing.

ICICI Bank, which claims to be the leader in the credit card business, has given out more than 2 million cards in the last four years. Even public sector behemoth State Bank of India had handed out 1.4 million cards at last count. And HDFC Bank, the newest entrant in the business, now has 425,000 users in barely two years.

• The number of credit cards in the market has shot up from 4.3 million to 9 million in the past four years
• ICICI Bank claims to be adding 100,000 new credit card customers each month. It is targeting customers who don't hold accounts with it
• Citibank has 29 co-branded and affinity cards -- the highest in the industry

The fact is that the Indian credit card business is growing at sizzling speed -- and there's a fierce battle on for the hearts, minds and wallets of the Indian middle class. Four years ago, there were 4.3 million credit cards being used in the country. That zoomed to 6.5 million in 2002. A year later that shot up once again to around 9 million credit cards. Says V Vaidyanathan, senior general manager, retail banking, ICICI Bank, "The credit card market in India had been deeply under-penetrated."

But as the figures show it's the Indian banks that have set the credit card market on fire. The foreign banks were extremely cautious and didn't dare to venture beyond a narrow base of customers in the metros. The result: banks like Citi and Standard Chartered have grown at relatively slow speeds.

But that's changing now and the credit card business is turning brutally competitive. The Indian banks in their bid to build volumes rapidly are taking credit card culture to the masses. Most importantly, they are heading to smaller towns and cities.

ICICI Bank, for instance, is leveraging its network to the hilt and is taking its credit cards to 67 cities. The bank claims to be adding 100,000 new credit card customers every month.

Similarly, SBI Cards is selling credit cards in about 41 cities, adding about 60,000 customers a month, followed by HDFC Bank, that plans to touch 23 cities by early next month, issuing about 40,000 cards per month.

Taking the cue from their Indian counterparts, the foreign banks are moving swiftly into action. For instance, StanChart now offers cards in 18 cities, of which eight cities were included in 2003. The bank plans to be in 25 cities by 2005.

However, around 80 per cent of its spends are still taking place in the top 10 cities. "At this stage there are lower spends in the smaller towns," says Srinivasan Shyam, general manager and head credit cards and personal loans, Standard Chartered Bank.

Citibank's card business, on the other hand, is spread over 30 cities and as the branch network increases, the card business is also expected to increase. The bank moved to three new cities in the last six months.

Each bank has employed a different strategy as it woos potential card users. ICICI Bank, for one, has been religiously playing the numbers game, by targeting customers who don't hold accounts with it. Of its 2 million cardowners, only 35 per cent to 40 percent are ICICI customers.

ICICI Bank has forged ahead in other ways too. It has pushed ahead ambitiously with its co-branded strategy and, as a result, it's the only Indian bank to have six co-branded cards in its kitty plus eight affinity cards.

It has teamed up for its co-branded cards with players like Hindustan Petroleum, BPL Mobile, Amway and Big Bazaar in Mumbai among others. Meanwhile, HDFC Bank and SBI Cards have two co-branded cards each.

Among the foreign banks, however, Citibank has 29 co-branded and affinity cards -- the highest in the industry. Says T R Ramchandran,head of cards, Citibank: "The co-branded and affinity cards are growing at 50 per cent faster than the vanilla card as we have tailor-made the offers to the customers."

ICICI Bank is also set to be issuing more free cards than anyone else in the industry (for these cards the banks waive the first-year fee). About 50 per cent of the ICICI credit cards issued currently are free cards.

Rivals, however, say that ICICI is playing a tough game. "One can never get to know how many customers revolve and how many renew their cards," says a senior executive in a rival bank.

HDFC Bank and SBI Cards say they bank on the quality of card holders. For both the banks, the core target is their respective customer base. Says Neeraj Swaroop, country head, retail banking, HDFC Bank: "With your own customers, delinquencies are lower and spends are higher."

Customers aren't the only problem for credit card companies. Both ICICI Bank and HDFC Bank are energetically acquiring merchants for their cards. ICICI set up its merchant acquiring business in 2001 and has a network of 25,000 terminals at present.

HDFC Bank has around 27,000 in a span of a year-and-a-half, while Citibank has around 22,000 terminals. There are now more than 100,000 electronic data capture terminals present in India.

Oddly enough, SBI is stubbornly refusing to follow this approach. The bank plans to develop a completely different strategy of issuing its credit cards in towns, which it has identified as "Project" towns.

Explains T S Bhattacharya, chief general manager, SBI: "It will be more like a travel card. We are targeting affluent project towns from where people travel out. For instance, we will issue cards to people working in the BHEL factory, situated in a small town like Ranipur (near Haridwar)." The plan is to cover at least seven such towns.

Why are all these banks making such aggressive moves into the credit card market? It's because globally around half of the profits of the consumer banks come from credit cards. This also holds true for foreign banks like Citibank and StanChart.

Citibank's profits on the card business are estimated to be over Rs 150 crore (Rs 1.5 billion) and StanChart's is at around Rs 100 crore (Rs 1 billion) to Rs 150 crore (Rs 1.5 billion). Among the Indian banks, SBI Cards is estimated to be the most profitable with over Rs 50 crore (Rs 500 million) as operating profit.

One major factor that could bring down profits for any card company is NPAs. The delinquencies or NPAs in the card industry are estimated at around 8.5 per cent to 10 per cent.

According to Shyam, StanChart's NPAs are around 200 to 250 basis points lower than the industry standards. Similarly, SBI Cards claims its NPAs are 300-400 basis points below the industry average.

Industry observers say that Citibank has got the most profitable model. Says an industry analyst: "They are able to retain their customers and churn their customers better, based on their behaviour."

Yet another factor that affects the profitability is the spends on cards. The industry average is anywhere between Rs 1,500 and Rs 2,000 per card per month. Citibank claims the highest spend at around Rs 2,500.

On the issue of whether Citibank is concerned with the fast growth of local players like ICICI Bank, SBI Cards and HDFC Bank, Ramchandran says, "Less than 0.6 per cent of the personal consumption expenditure in India is through cards as against 16 per cent in the US. Thus, there is a huge potential to tap."