Reserve Bank of India’s latest payments data shows something interesting: credit card spending growth in tier-2 and tier-3 cities is outpacing metros by a significant margin. Indore, Surat, Coimbatore, and Nashik are seeing double-digit percentage growth in card transactions while Mumbai and Delhi grow single digits.

This isn’t just about more cards being issued. It’s about changing spending behaviour in smaller cities, rising incomes, and digital adoption that’s finally reaching beyond metros. For banks, it represents a shift in where credit growth is happening.

The Numbers Tell a Story

Transaction volumes in tier-2 cities grew 23% year-on-year in the last quarter of 2025, compared to 11% in metros according to RBI’s payments system data. Average ticket sizes are smaller in tier-2 cities, but the growth trajectory is steeper.

Coimbatore’s credit card spending growth exceeded 30% annually. Indore and Surat aren’t far behind. These cities have always had economic activity, but cash dominated transactions. The shift to digital payments, including credit cards, accelerated post-pandemic and hasn’t slowed.

Card issuances in tier-2 cities are also rising. Banks that historically focused on metro and tier-1 cities are now actively marketing in smaller cities. The customer acquisition costs are lower, and credit quality is often better because tier-2 customers tend to be more conservative with debt.

What’s Driving This?

Rising incomes in tier-2 cities matter. These cities have manufacturing, trade, and increasingly, services sectors that generate disposable income. A Coimbatore textile businessman or a Surat diamond trader now earns comparable income to a Delhi professional, but with lower living costs.

E-commerce penetration is a major factor. You can’t easily use cash for online purchases. Credit cards and UPI are the practical options. As tier-2 residents buy more online, card usage grows naturally.

Travel is another driver. Tier-2 city residents are travelling more, both domestically and internationally. Hotel bookings, flight tickets, and online travel agencies all push customers toward cards. Many hotels require a card for check-in even if you plan to pay cash.

Lifestyle changes play a role too. Subscription services, streaming platforms, food delivery apps, and digital services require recurring card payments. The Netflix economy reached tier-2 cities a few years ago and it’s reshaping payment habits.

Bank Strategy Shifts

HDFC Bank, ICICI Bank, and Axis Bank are all ramping up tier-2 city presence. They’re opening branches, running targeted card campaigns, and adjusting underwriting models for tier-2 applicants.

Credit scoring for tier-2 customers is different. Bureau scores might be thinner because fewer people have credit histories. Banks are using alternative data including GST filings for businesses, utility payments, and digital transaction histories to assess creditworthiness.

Regional rural banks and small finance banks are also entering the credit card market, targeting tier-2 and tier-3 customers that private banks overlook. Their local knowledge and existing relationships give them advantages in assessing risk.

Co-branded cards are popular in smaller cities. Cards offering discounts on fuel, groceries, or specific retailers resonate more than generic reward points. A card that gives cashback at Big Bazaar or discount on HP petrol stations has clear value that customers understand immediately.

Spending Patterns Differ

Metro customers use cards for everything from coffee to rent. Tier-2 customers are more selective. They use cards for significant purchases, online shopping, and travel, but still prefer cash or UPI for daily expenses.

This creates different spending patterns. Average monthly spend per card is lower in tier-2 cities, but it’s growing faster. As customers get comfortable with cards for larger purchases, they gradually extend usage to smaller transactions.

Revolving credit behaviour is less common in tier-2 cities. Customers tend to pay off balances monthly rather than carrying debt. That’s culturally influenced; debt carries more stigma in smaller cities than in metros where EMIs and credit are normalised.

From a bank’s perspective, this means lower interest income per card but also lower default risk. It’s a different risk-return profile that requires adjusted product strategies.

Digital Infrastructure Improvements

Point-of-sale terminal penetration has improved dramatically in tier-2 cities. Small shops that only accepted cash five years ago now have card readers. Government’s push for digital payments accelerated this through subsidies and simplified onboarding.

4G and now 5G coverage in tier-2 cities enables seamless digital payments. When network connectivity was spotty, merchants and customers preferred cash because card transactions failed too often. Better telecom infrastructure made cards reliable enough for everyday use.

The government’s push for digital payment infrastructure through BharatQR and other initiatives made card acceptance infrastructure cheaper and easier to deploy. Merchants in smaller cities can afford card acceptance now, which wasn’t true a decade ago.

Challenges Remain

Financial literacy gaps exist. Many tier-2 customers don’t fully understand interest charges, minimum payment traps, or how credit scores work. Banks that educate customers build better relationships and lower default risk.

Some customers get multiple cards quickly and overextend. Banks competing for market share sometimes approve customers who shouldn’t have credit. We’re seeing early signs of stress in some tier-2 portfolios where underwriting was too aggressive.

Collection infrastructure in tier-2 cities is less developed than metros. If delinquencies rise, banks have fewer options for effective collection. Legal proceedings are slower, physical branch networks are thinner, and digital-only collection methods don’t work on all customer segments.

Regulatory Watch

RBI’s been tightening credit card regulations in response to rapid growth. Recent guidelines around card issuance processes, KYC requirements, and unsecured lending apply equally to tier-2 and metro markets.

The regulator’s concerned about consumer protection, especially in markets where financial literacy is lower. Aggressive sales practices, hidden fees, and unsuitable product sales are all areas of regulatory focus.

Banks expanding in tier-2 cities need robust compliance frameworks. The regulatory environment doesn’t give tier-2 markets any special treatment. If anything, RBI expects higher standards of consumer protection when targeting less sophisticated customer segments.

What This Means Going Forward

Credit card growth in tier-2 cities will likely continue. These markets are underpenetrated relative to income levels. As infrastructure improves and digital adoption increases, card usage will keep climbing.

Banks that build strong tier-2 presences now will benefit from demographic and economic tailwinds. But they need to understand these markets aren’t just smaller versions of metros. Customer behaviour, risk profiles, and product preferences differ.

The shift also changes the geographic concentration of credit risk. Historically, Indian credit card portfolios were concentrated in top six metros. That’s diversifying, which is healthy from a portfolio risk perspective but requires different regional economic monitoring.

We’re watching a major structural shift in Indian consumer finance. The tier-2 city middle class is embracing credit cards at scale. That creates opportunities for banks, risks if underwriting is poor, and changes in how we think about consumer lending in India.

The data from the last few quarters suggests this isn’t a temporary blip. It’s a fundamental change in where credit card growth is happening. Banks positioned to serve tier-2 markets effectively will capture disproportionate growth over the next five years.