SBI Cards IPO: This clause will open more revenue sources for SBI

SBI Cards, the credit card subsidiary of State Bank of India (SBI), has a provision for paying a royalty to the parent bank for using its brand name. This opens up additional sources of revenues, apart from dividends and divestment of shares, for the state-owned lender.

SBI Cards, which is coming out with Rs 9,000 crore worth IPO (initial public offering) on March 2, is already the second-largest card issuer in the market after HDFC Bank. It scaled up its business manifold in the last few years and moved past big brands like Standard Chartered and Citibank in terms of the number of customers.

As per the agreement signed between SBI and SBI Cards, the royalty is fixed at 0.20 per cent of revenues or 2 per cent of profit after tax, whichever is higher.

With the card business scaling up, SBI may earn handsome royalty fee from the card business in future. Currently, its revenue has grown from Rs 3,364 crore in March 2017 to Rs 6,999 crore in March 2019. In the first six months (April-Sept) of 2019-20, its revenue touched Rs 4,363 crore.

Also read: SBI Cards IPO: 5 things to know about upcoming IPO

Experts believe the credit cards business has a good future in India as younger people prefer to use them for consumption needs. Also, SBI, being a strong brand name, has enough funds to scale up the credit card business.

Interest rates are also based on risk-based pricing, where the card company charges high-interest rates because of higher default incidences. This model is working fine with card companies.

SBI currently holds 74 per cent stake in the company and the balance 26 per cent is held by CA Rover Holdings, a Carlyle Group company. The company was started two decades ago with GE Capital. Two years ago, SBI and the Carlyle Group acquired the GE Capital's stake in it. The current offer comprises a fresh issue and a sale offer by existing shareholders.

SBI Cards is the second SBI subsidiary to be listed on bourses in the last few years. SBI Life Insurance Company, listed two years ago, offered shares at Rs 700 per share. Its stock value today is Rs 916 per share, and the market capitalisation is Rs 91,630 crore. Besides, the lender plans two more listings in the next one-two years, SBI Mutual Fund and SBI General Insurance.

SBI credit card arm files IPO papers to raise Rs 9,600 crore with SEBI