• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Pradeep S. Mehta

The interest rate charged annually by credit card issuers is 30-36 per cent (compounded) — amongst the highest in the world. There is no specific law to regulate credit card operations, and to make matters worse, the RBI does not think that it has the powers to regulate the interest rates.

RECENTLY the issue of usurious interest rates charged on credit cards by banks was raised by Dr Vijay Kelkar, adviser to the Finance Minister. Dr Kelkar rightly questioned why the banks continued to charge high rates on credit card operations when the overall interest rates were falling. However, nothing came of it.

The interest rate on outstanding credit is a startling 2-2.5 per cent per month or 30-36 per cent annually (compounded) on revolving credit which is amongst the highest in the world.

There is no specific law to regulate credit card operations. And to make matters worse, the RBI does not think that it has the powers to regulate the interest rates. About 1 per cent of India's population has credit cards, and the number is growing at 25-30 per cent annually. Credit card issuers see a huge market in the burgeoning middle-class, especially in the category which does not have or has ever had credit cards.

However, not all credit card users have found it convenient. This is evident from estimates which put the failure rate in credit card payments to 10-11 per cent per annum. The reasons are not too far to seek. The annual interest rate of 30-36 per cent is nothing short of a usurious practice, particularly when both deposit and lending rates are plummeting. The high interest rate does not include other charges, such as transaction fees, membership fees, annual charges and late payment fees.

The credit card portfolio of a bank has become a profiteering centre where revenue from interest accounts is 40 per cent, and revenue from late payment, merchant discount and annual fees is 30 per cent, 10 per cent and 20 per cent respectively. By the time a user realises the overwhelming impact of compounded dues, defaulting on payments becomes the easy way out.

The issue of card education by issuers is an aspect that contributes to the general air of malaise. The credit card issuers never inform the prospective customer how exactly the annual percentage rate (APR) is calculated. At best the issuers cleverly mention that the interest rate calculation is done on a daily product basis. Does this give enough insight to a layman as to how interest charges on card outstandings are arrived at? The fact is that unless the cardholder piles up a bill and carries over the payment to a distant date, the issuer is not going to get that "extra" income. That is the reason, why the issuer never asks for full payment on presentation of its bills, but only a part of it.

The "race to the top" amongst the credit card issuers is primarily through acquisition of more credit card accounts rather than growth-based quality. Often, they appoint agents to procure business. These agents tend to oversell so that they can maximise commissions. It appears that the high interest rates on unpaid balances are being used to set off high levels of delinquency in the industry. This is a case of robbing Peter to pay Paul.

In other countries, commentators and regulators have already recognised the dangers that the credit card business can cause to the financial system.

Not only is aggressive marketing being discouraged, but also stronger regulatory mechanisms are being put in place.

In Thailand, a universal cap of 18 per cent has been announced as being chargeable on credit cards. The minimum monthly salary requirement for credit cardholders is being raised from an equivalent of $175 to $350. This will halve the number of Thai consumers eligible to get credit cards.

South Korea's financial supervisory commission has decided to inspect the financial health of the country's 26 credit card companies as part of the crackdown on reckless lending to consumers.

Some analysts feel that non-performing card outstandings can cause a second financial crisis.

Even in the US, bank regulators have recently adopted new rules that can restrain issuers from giving cards to any and everybody.

In most developed countries the consumer credit laws also cover credit card operations. In India, we do not as yet have any consumer credit laws. One law: Hire Purchase Act of 1972 has not been implemented at all.

The RBI prefers to pursue the policy of laissez-faire in the matter. It feels that "... credit card is basically a payment facility and as credit is incidental (sic), the interest rate directives of RBI on loans and advances do not apply to the fees/service charges imposed on credit cards. Credit cards being in the nature of other non-priority sector personal loans, banks are free to determine the rate of interest without reference to the prime lending rate."

Similarly, on education of prospective clients by the issuers, the RBI is cryptic: "The customer availing of the credit card is expected to go through the terms and conditions before accepting the card."

Clearly, there is a strong case for the RBI to:

Stories in this Section
The sinking pension ship

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line