SBI Card's Profitability Challenges and Asset Quality Risks in India's Unsecured Lending Sector

India's unsecured lending sector, once a beacon of growth for financial institutions, is now grappling with a perfect storm of rising delinquencies, elevated provisioning costs, and shifting consumer behavior. At the heart of this turmoil sits SBI Card, the country's largest credit card issuer, whose Q1 FY2025 results underscore the fragility of its business model in a segment increasingly defined by risk. With gross NPAs climbing to 3.06% and credit costs hitting 8.5%, SBI Card's struggles reflect broader systemic pressures in India's retail finance ecosystem. For investors, the question is no longer whether the unsecured lending model is flawed but how sustainable it can be in a landscape where over-leveraged borrowers and economic volatility are now the norm.

Delinquency Trends: A Sector in Transition

SBI Card's unsecured lending arm has seen its delinquency rates climb steadily, driven by a confluence of factors. Customer over-leveraging—where individuals maintain multiple credit lines from different lenders—has eroded repayment capacity, particularly among lower-income cohorts. Meanwhile, unexpected life events, from job losses to health crises, have exacerbated defaults even among historically reliable borrowers. These trends are not unique to SBI Card; the Reserve Bank of India's Financial Stability Report notes that retail delinquencies in credit cards and personal loans have stabilized in Q1 2025, but microfinance remains a ticking time bomb, with NPAs surging to 16% in FY2025.

For SBI Card, the pain is acute. Its credit cost of 8.5% in Q1 FY2025, up from 7.5% in the prior quarter, reflects a deteriorating credit environment. This is compounded by a 32% quarterly jump in provisions for bad loans to INR 12.44 billion, a figure that outpaces even the sector's worst performers. While SBI Card's NIM remains stable at 10.9%, its ROAA (4.1%) and ROAE (19.1%) suggest a narrowing margin of safety as provisioning pressures mount.

Provisioning Pressures: A Double-Edged Sword

Provisioning costs have become a critical drag on profitability. SBI Card's incremental provisions rose by INR 51 crores quarter-on-quarter, while write-offs surged by INR 105 crores. These figures are part of a broader trend: India's banking sector saw NPA provisioning jump by 8.3% sequentially in Q1 2025, with private banks like ICICI and HDFC also tightening belts. For SBI Card, the challenge lies in balancing aggressive provisioning with capital efficiency. Its capital adequacy ratio of 20.6% provides some buffer, but the company's cost of funds has climbed to 7.5%, squeezing net interest margins and reducing flexibility to absorb further slippages.

The microfinance sector's woes highlight the sector's vulnerability. With small-ticket loans (under INR 30,000) declining by 35.9% year-on-year and NPAs doubling, lenders are pivoting to higher-ticket loans. SBI Card's decision to reduce credit limits on 500,000 high-risk accounts in Q1 2025 is a defensive move, but it signals a shift away from its mass-market strategy. This raises a critical question: Can SBI Card sustain growth while tightening underwriting standards?

Strategic Adaptations: Can AI and Risk Mitigation Save the Day?

SBI Card's response to these challenges has been twofold: tightening risk management and embracing technology. The company has refined predictive modeling and scorecards to identify high-risk accounts earlier, while cross-sell restrictions and early account blocking based on spending triggers aim to preempt defaults. These measures are part of a broader industry trend toward AI-driven underwriting, which could mitigate some of the sector's systemic risks.

However, technology alone cannot solve the root problem of over-leveraged consumers. SBI Card's reduction of credit limits on 500,000 accounts—a 50% increase from the previous year—reflects a pragmatic approach, but it also risks slowing growth. For investors, the key is to assess whether these measures can stabilize asset quality without sacrificing revenue. SBI Card's Q1 FY2025 data shows that cardholder spending rose 11% year-on-year to INR 883.65 billion, suggesting that demand remains robust. Yet, this growth is increasingly at odds with the need to curb risk.

Industry-Wide Implications: A Sector at a Crossroads

The unsecured lending sector is at an inflection point. While credit card delinquencies stabilized at 2.00% in Q1 2025, the microfinance crisis underscores the fragility of India's retail finance model. For SBI Card, the path forward hinges on its ability to adapt to a new normal where risk-adjusted returns—not pure volume—drive success. This includes leveraging AI to refine underwriting, collaborating with digital payment platforms to improve repayment efficiency, and recalibrating its product mix to prioritize higher-margin, lower-risk segments.

Yet, systemic risks remain. The RBI's Financial Stability Report warns that under high-risk scenarios, India's gross bad loan ratio could spike to 5.3% by 2027. For SBI Card, this would mean a further erosion of profitability and capital buffers. The company's 20.6% capital adequacy ratio is strong, but it may not be sufficient to withstand a prolonged downturn.

Investment Considerations: Balancing Risk and Reward

For investors, SBI Card presents a high-risk, high-reward proposition. The company's market leadership and technological capabilities offer long-term upside, but its current profitability is under siege. The key is to monitor its ability to balance risk management with growth. If SBI Card can stabilize its NPA ratio and reduce credit costs to below 8% by mid-2026, it could regain investor confidence. Conversely, a failure to curb provisioning pressures could trigger a capital crunch and erode returns.

In the short term, a cautious approach is warranted. While SBI Card's stock has outperformed some peers, its valuation is not a discount. Investors should also keep an eye on broader economic indicators, such as interest rate trends and consumer spending behavior, which could either alleviate or exacerbate the sector's challenges.

Conclusion: A Test of Resilience

SBI Card's journey in the unsecured lending sector is a microcosm of India's financial system: a blend of explosive growth and systemic vulnerability. While the company's strategic adaptations offer hope, the sustainability of its business model remains unproven. For now, the focus must be on resilience—whether SBI Card can navigate the current delinquency wave without compromising its long-term profitability. In a market where over-leveraged consumers and regulatory scrutiny are here to stay, the answer to that question will define the company's future—and its value to investors.