Are your credit card benefits getting curtailed? Here's why banks are making changes

Banks are continuing to restrict the rewards on their credit cards, with Axis Bank being the recent one to curtail its benefits. The bank has tweaked conditions on some of its credit cards, including the Magnus Credit Card, concerning reward earnings, lounge programs, and annual fee waiver exclusions. These changes will take effect from April 20, 2024.

Some of the changes in the Magnus Credit Card include the threshold for annual fee waiver, which will no longer include spends on insurance, gold/jewelry, and fuel categories. Similarly, expenditures on fuel, insurance, and gold/jewelry will not be eligible for basic or expedited Edge reward points.

It's not just Axis Bank, several credit card providers, such as HDFC Bank and SBI Card, have also recently revised their credit card rewards. So why are banks curtailing the credit card benefits? The depreciation in rewards and benefits available on credit cards is primarily linked to the economic conditions post-Covid-19, notably inflation. With the rising cost of goods and services, experts say that credit card companies have been forced to re-evaluate the sustainability of their rewards programs.

"In this day and age, credit card firms and their business partners are faced with several challenges, all of which boil down to running the business sustainably. These challenges range from meeting customer demands in the face of inflation to tough competition and the need to improve margins," said Adhil Shetty, CEO of BankBazaar.com to Business Today. "As digital payments grow rapidly, and more and more Indians become eligible for a credit line, credit card firms will need to reassess their rewards programs, among other things, to ensure sustainable growth," he adds.

Axis Bank had earlier revised the terms of its Magnus Credit Card from September 1, 2023. In addition to losing its 25,000 points monthly milestone benefit, the annual fee for the card has been increased to Rs 12,500 from Rs 10,000 earlier.

Statistics show that credit card numbers are rising rapidly in the country, with the total number of credit cards in existence having jumped 5 times in the past 10 years to more than 99.5 million as of January 2024, from 19.6 million in 2014.

Another reason for the reduction in benefits is the decreasing revolver rate for the industry. With credit card users classified into three categories—transactors, revolvers, and EMI users—experts say that revolvers are typically the most profitable cardholders for issuers. They add that there is also a growing practice among individuals of opting for personal loans to settle their credit card balances. But paying their higher-interest-incurring credit card dues with low-interest-rate personal loans has contributed to the reduction of margins for credit card providers as they miss out on the interest they would have otherwise earned. SBI Card's revolver rate, for instance, has dropped to 23 per cent in Q3FY24, from 34 per cent in Q2FY21.

"However, the low revolver rate has been offset by the high number of equated monthly installments (EMI) on credit cards. Many of these are interest subventions, where the interest is borne not by the customer but by the vendor or manufacturer. These have translated into discounts for customers, but they have not impacted the revenues of credit card issuers,” explained Shetty.

 

High Risk Weightage

 

The rise in unsecured lending and the slight increase in defaults led the country's central bank to take corrective action. It recently increased the risk weight for credit card receivables and personal loans. Per its notification in November 2023, the risk weight on credit card receivables has been increased by 25 per cent, considering that commercial banks currently attract a risk weight of 125 per cent, while NBFCs attract a risk weight of 100 per cent.

The increase in risk weightage by the RBI means that credit card companies now set aside more capital. Earlier, for every Rs 100 in credit card receivables, the risk weight was 125 per cent—that is, Rs 125. After the increase to 150 per cent, the risk weight becomes 150 per cent of Rs 100—that is, Rs 150. Hence, assuming a capital adequacy ratio (CAR) of 9 per cent, the bank now sets aside Rs 13.50, at 9 per cent of Rs 150, compared with Rs 11.25, at 9 per cent of Rs 125. Consequently, the increase in capital requirement for lenders and card providers comes to Rs 2.25 for every Rs 100 in credit card receivables.

This means that banks and credit card providers now have to put aside more funds, reducing the amount they can lend. This has an impact on the rewards, and we can see them rationalizing.

Hence it is important for cardholders to stay informed about such devaluations. When a card is devalued, users should check if the updated features are suited to their spending habits. If not, they can look at other options that provide them better value. While considering other cards, it is important to ensure that the chosen card not only aligns with your spending habits but also offers value-back that is higher than the devalued card.