Credit cards: What next?

Major banks have quietly turned up the heat on credit card holders with a hike in interest rates over the past few months. Market leaders like ICICI Bank, SBI Cards and ABN Amro have raised rates after reviewing their cost of funds or due to a routine need to align with the industry. ICICI Bank, the largest credit card issuer in India with over 7.5 million live cards, has hiked interest rates from 2.9 per cent to 3.15 per cent. This would mean an annual increase of almost 3 per cent.

Companies charge interest if a customer carries forward credit beyond the payment cycle. The monthly rate could be between 1 per cent and 3.4 per cent, translating to 12-42 per cent annually.

The higher rates may catch many unawares. While some responsible companies send out advisories, others do not indicate the interest rate charged on the monthly statements provided to customers. Provision for a change in interest rates already exists in the terms and conditions given to a consumer at the time of card issue. However, that may be no consolation to a card holder suddenly saddled with inexplicably higher debt.

To be fair, collection of dues is a bit of a thorny issue. Banks are witnessing the highest losses in their credit card operations. Defaults on personal loans are estimated at 12 per cent while the losses on account of personal loans work out to 4 per cent, according to a recent study by a private bank. Collection of dues is a tough challenge for the industry and has become something of an outsourcing business with large number of collection agencies coming up across the country to work on behalf of banks. There is an additional cost involved in making recoveries, but banks are forced to incur these just to ensure the defaults do not lead to losses.

Moreover, the study also found that credit card dues are at the bottom of the customer’s priorities. Bank borrowers seem to give the highest priority to repayment of home loans from their monthly earnings, followed by making payment for utilities like electricity, telephone, repayment of car loans and only then to credit cards.

Customers, on the other hand, accuse banks of arm-twisting tactics ( in particular by ‘Direct Selling Agents’) and misleading promises. The Monopolies and Restrictive Trade Practices COMMISSION had last year put several banks under the scanner. Interestingly, credit card companies here have collected more than Rs 6,000 crore in a decade by way of fines and late fee. The MRTPC had also ordered a probe into these fees levied by them.

Of course, consumer debt is a global problem. Taiwan was a disaster in credit card dues recently and UK-based banks have written off 5.2 billion pounds of consumer lending in 2005. The outstanding balance on Taiwan’s credit-card debt was at $13.2 billion, according to the Taiwan Financial Supervisory Commission with 700,000 so-called ‘card slaves’ struggling to clear debt. This, in a population of just 23 million.

Both banks and the government are taking stock of the situation. Finance minister P Chidambaram recently told the Lok Sabha that a law to regulate credit card payments was on the anvil. In his question, the CPM MP Rupchand Pal had sought to clear ‘grey areas’ in credit card collection. In particular, he sought monitoring of those agencies, other than banks, that operate in credit card transactions.

Earlier, following a public interest litigation, the Madras High Court had issued notices to the Reserve Bank of India on a petition seeking to regulate credit card operations and to protect consumers. The PIL sought strict implementation of the RBI’s guidelines in the Master Circular on Credit Card Operations of Banks. The guidelines were broad in scope and included marketing and debt collection.

The Reserve Bank, on its part, recently approved the launch of India’s first credit information bureau—Credit Information Bureau of India. A fallout of the subprime crisis in the US and be set up by Citigroup, ICICI Bank, amongst others, the bureau will begin grading 100 million borrowers from November. It hopes to help banks curb defaults and allow creditworthy customers to pay lower interest rates.

So, perhaps more two-way information in the future will ensure that plastic dues do not swipe that smile off your face.