Column : To their credit

Wed, Oct 28 02:39 PM

With rising defaults, banks have tightened the aggressive expansion drive of their credit card business. The latest Reserve Bank of India data shows that credit card outstandings during this year till August end fell by Rs 4,167 crore, a 14.3% decline as compared with the same period last year. Even the total number of outstanding cards fell to 196.68 lakh as compared with 267.33 lakh in the same month last year. In any case, credit cards are a low-margin business for banks in India because of low income per card and the high initial investments. In fact, Indians spend just 1% of their total purchases through credit cards, while the world average is around 12%.

However, the economic buoyancy in the past few years saw banks chasing all and sundry in order to increase their market share. They issued multiple cards to the same set of people under different branding without any proper due diligence. Still, the business until last year was growing at around 20% annually.

Now, with rising defaults, banks are becoming more vigilant. They are blocking transactions of all cards issued by the bank if the customer defaults on any one card. Many banks have stopped cash withdrawal facilities and have lowered the amount of credit limit on cards.

Anecdotal evidence suggests that the number of repeat defaulters has risen from 15% in 2005 to about 25%. It may rise further. Transaction volume is also down because of a decline in private consumption demand. The increasing exposure to higher risk customers is mainly through personal loans and credit card receivables as these are unsecured. To reduce defaults, banks issuing credit cards will have to profile their customers more intensely and devise various cutomised pricing as done in other developed countries. Just tightening the use of credit cards will not be sufficient.

—saikat.neogi@expressindia.com

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