Increased credit card use may hit banks’ bottom line


cardAs demonetisation becomes a year old, the side effects of this surgical strike, both positive and negative, have started emerging clearly. One year is enough to determine its efficacy. One side effect of demonetisation which has hitherto gone almost unnoticed is a sudden spurt in usage of credit cards for digital payments. Significantly, post-demonetisation, the credit card holders’ collective liability to banks has soared to over 60,000 crore by the end of this September. It is significant, in fact extremely significant, as the spurt is a staggering 39 per cent in one year. Surely the credit card issuances have risen sharply in recent times with the increase in online shopping thanks to e-commerce boom.

It appears that banks took advantage of cash squeeze post demonetisation to give a fillip to credit card usage. The banks sold over 60 lakh credit cards in just one year. One outcome of this increased credit card usage has been that many have been caught unaware and they now find themselves in a credit-debt-trap thanks to the whopping interest rates that go up to 40 per cent in case of default. The interest rate is calculated in case of credit cards on an average daily balance method.

Banks are now realising that like Kisan Cards, credit card may also become non-performing asset (NPAs). The banks are already saddled with swirling NPAs. It was only last month that the Centre unveiled an ambitious plan to infuse 2.11 lakh crore capital over the next two years into public sector banks (PSBs) saddled with high non-performing assets. The move is vital for the slowing economy, as private investments remain elusive in the face of the ‘twin-balance sheet problem’ afflicting corporate India and public sector banks reflected in slow bank credit growth.

Several economists opine that the recapitalisation of banks is critical for revitalising the country’s growth momentum at a time when the global economy is recovering. The funding to banks would be provided through budgetary provisions of 18,139 crore and the sale of recapitalisation bonds worth Rs. 1.35 lakh crore. The balance would be raised by the banks themselves by diluting the government’s equity share. The severity of the issue can be understood from the fact that Finance Minister Arun Jaitley himself admitted while announcing sops to banks that“Indiscriminate lending earlier by banks led to a high level of NPAs and these NPAs were kept under the carpet.Now they have come to light because of the Asset Quality Review conducted by the Reserve Bank of India.”

Post-demonetisation, the government announced that its focus would be on digital payments and the credit card is one of the innovative and modern payment options. It is not an evil per se provided one knows how to uses it sagely.

Indeed, a credit card comes in handy in cases of emergencies such as hospitalisation or emergency travel. However, its indiscriminate use can ruin a person’s personal budget and lead to NPAs for banks. The smart user avails all its benefits including discounts, complimentary insurance, rewards points and special privileges associated with individual cards. However, for many the temptation or trap of ‘purchase now and pay later’ encourages reckless spending and many credit card holders end up spending more than their ability to repay. This situation creates a credit-debt-trap, a vicious circle.

The banks, already facing the threat of alarming NPAs, appear to be sitting on another time bomb. Another issue is that the card business is not properly regulated nor is there an awareness programme by banks to enlighten credit card users about the uses and pitfalls of plastic money. There is a need for the Reserve Bank of India (RBI) to monitor interest rates charged by banks on credit cards and to launch awareness campaigns. It is learnt that the RBI has asked banks to consider the due date on which the customer is supposed to pay the minimum amount towards credit card dues while calculating the 90-day period beyond which the customer will be considered an NPA if there is no payment made.

“To bring in greater credit discipline as also to provide operational flexibility to credit card issuers, it has been decided that, with effect from the date of this circular, ‘past due’ status of a credit card account for the purpose of asset classification would be reckoned from the payment due date mentioned in the monthly credit card statement,” the central bank has said in a notification. Earlier, banks took the date of the next billing statement while calculating the 90-day period. Typically, the gap between two credit card statements is a month. However, for levying penal charges, the banks can stick to the current practice of doing so when the customer fails to make payment within three days of the due date, the RBI added. The RBI has said these measures would ensure greater ‘credit discipline’ among borrowers.

According to RBI data, banks issued more than 1,78,000 credit cards in April and the outstanding credit cards issued went up to 2.12 crore. As of May end, credit card outstanding amounted to 32,400 crore, a growth of 23% year-on-year. The RBI stated that a credit card account will be treated as a NPA if the minimum amount due is not repaid fully within 90 days from the due date mentioned in the card statement. The decision is a shift from the central bank’s earlier policy of classifying a credit card account as NPA only if the minimum amount due is not fully repaid within at least 120 days of classifying it as past due.

In the current notification, the banking regulator also said that any credit card account will be classified under the “past due” status on a bank’s books from the due date mentioned on the credit card statement. These steps are aimed at improving credit discipline among credit card users and to provide further operational flexibility to the card issuer, RBI said in its notification.

It is clear that the economic progress of a nation and development of its banking sector is invariably interrelated. The banks serve social objectives through priority sector lending, mass branch networks and employment generation.

Maintaining asset quality and profitability are critical for banks’ survival and growth. To achieve such objectives, a major roadblock to banking sector is prevalence of Non-Performing Assets (NPA). The recent moves by the RBI on credit cards seem to be a step in the right direction. These would not only help banks to check rising NPAs but also take credit card holders out of debt-trap.