|
|
|
|
|
Monday, 25 August 2008 |
|
BANKING & FINANCE
Card Conundrum
Defaults are growing but banks can't seem to stop issuing fresh credit cards. Laisram Indira takes a look
When Abhishek Vaidya, accounts manager, was wrapping up his work in India to take up a posting in Shanghai, he did not forget to sign cheques for all the routine payments – including one for his credit card dues.. But no sooner had he left than collection agents started hounding his house for non-payment of dues. Though the issue was finally sorted out, Vaidya is still to come to terms with the bank's ham-handed behaviour.
Meanwhile, at Patiala House court complex in New Delhi, the consumer courts are inundated with cases from consumers who are upset with the behavior of the recovery agents being used by their credit card issuers. The number of such cases have shot up alarmingly in recent times, points out Shailesh Madiyal, partner, BBPM Law Associates, in Delhi.
The head of a credit card division of a nationalised bank doesn't want to give out any specifics – but he readily admits that the relationship between customers and credit card issuers is souring. He agrees that recovery agents often go beyond their brief – but he also points out that default cases have been rising too fast for comfort. "The credit card business is not profitable for most banks. And it has been getting worse of late," he says by way of explanation.
Meanwhile, on any given day, thousands of sales agents make calls without break, hoping to persuade another customer to sign up for a new credit card.
These are strange times for the credit card issuers. On the one hand, almost every bank in the cards business today agrees that defaults are rising. Shameek Bhargava, managing director, head of cards (Asia Pacific), Deutsche Bank, India, said recently that default rates across the card industry were double what they were even a year ago. Last year, the default rates ranged between 5 and 7 per cent. Currently, they are in double digits. And these are cases of actual defaults – not people who are barely keeping their names of the default list by paying the minimum amount and rolling over the debt. By some accounts, the number of the latter group would be twice that of the actual defaulters.
On the other hand, the banks cannot stop issuing free cards to new customers. For the credit card business to be profitable, you need to have lots of customers – and you need those customers to spend money on their cards. By giving away cards for free, most banks have ensured the first. It is the second part that is the problem. Because the credit card culture is still in its infancy in the country, most multiple card holders use just one or two active cards – and lock away the remaining cards. If they don't spend on a card, the bank makes no money from the card. According to Credit Card Management Consultancy (CCMC), about 25 million credit cards have been issued in the country. However, 40 per cent of the cards are still inactive as a large number of consumers have multiple cards, while they use only one or two actively.
And yet, banks admit, in the credit card business, consumer spending in a double edged sword. The most credit worthy customers are not the best users of cards. When they spend on their cards, they tend to pay the entire bill amount promptly on time – which means the bank earns precious little in terms of interests or other charges. Reserve Bank of India data shows that while Rs 60,000 crore of credit card transactions took place between May 2007 and May 2008, only about 20 per cent of these were actually rolled over. And it is these rollovers that provide the real gravy for the banks.
But it is precisely the people who roll over debt – and are therefore more profitable – who also cause the most headaches for the banks. A high proportion of them roll over the minimum amount for some time, before turning defaulters. Quite often, it is these people who also drag the banks to court for undue harassment from recovery agents.
Defaulting consumers often claim that it is the credit card companies who are encouraging people to default. "Banks are actively encouraging people to default," says Rishi Bhatnagar, a lawyer. "It is nowhere explained to the borrower when he gets a credit card as to how much he should pay. It is always a 'minimum amount due' statement that comes. You are encouraged to pay minimum amount and when you are about to default they spring another offer -- they encourage you to use another credit card to clear the debt." And the vicious cycle continues, he says.
The banks predictably disagree. Points out Sandeep Bhalla, Business Manager-Cards, Citibank: "Statements are mailed to customers every 30 days and customers have more than 18-22 days to make a payment. If a customer pays within that timeframe, they are not in "default," he says. "Each and every cardmember statement clearly shows the last date by which customers have to make a payment. The customer then has the privilege to choose to pay back anywhere between 5% of the balance to 100% of the balance. This gives customers full control on their monthly payments and a complete planning option depending upon their financial outlays each month. If potentially a customer fails to pay at least 5% of the total balance due during the disclosed time, he/she is deemed 'defaulter'."
The problem is the interest charges levied if only 5 per cent is being paid, points out a customer. Interest rates charged by Indian credit cards are among the highest in the world. Many banks charge 25 per cent or even 30 per cent per annum. The Reserve Bank recently issued fresh guidelines in a bid to tighten the leash on credit card issuing banks. The apex bank, last month asked them not to charge excessive interest rates on personal loans and prescribe a ceiling rate on small advances, a move that will benefit lakhs of card users. Although the RBI has not specified the limit of the interest rates that can be charged by the banks issuing credit cards, it had earlier clarified that "the total cost to the borrower, including interest and all other charges levied on a loan, should be justifiable having regard to the total cost incurred by the bank in extending the loan."
In their defense, credit card issuers claim that they are more sinned against than sinners. "In a perfectly competitive marketplace, of which India is an example vis-a-vis credit cards, interest rates are determined by the market based on several factors that include borrowing costs, credit card losses, product acquisition costs and customer communication expenses," says Citibank's Bhalla. "Given that all these costs are rising in India, we feel that the current market pricing is fair and market-determined, giving us the ability to service a large part of the customer base across the country. As the credit card markets mature, market factors will determine different price points to offer."
Of late though, credit card issuers are trying hard to also make sure that despite the high interest charges, consumers get a fair chance to pay their dues. Most banks today offer to turn the credit card spends into Equated Monthly Installment (EMIs) payments, which attract less interest rates on outstandings. While this method has existed for some time now, many banks have become proactive in ringing up and offering this facility to their customers who have done some big ticket purchases on the card. |
|
 |
|
Sensex rises 61 points in opening trade 
