Mumbai: Growing defaults are forcing banks to shrink their credit card portfolios aggressively. In the first five months of fiscal 2009, the credit card base in India has fallen by 1.5 million to 26.73 million, according to the Reserve Bank of India, or RBI.
Bankers said the trend has intensified in recent months and the portfolio may have shrunk by about 10% this fiscal year so far. This is significant as the industry has seen growth at an average 30% in each of the past four years.
The percentage of non-performing assets, or NPAs, in banks’ credit card portfolios has almost tripled, going up from 5-8% in fiscal 2008 to 15-20% in the current fiscal. NPAs are the portion of the credit card portfolio where a customer has not paid dues for at least 90 days.
However, this will not make a huge dent in banks’ profitablity, as despite the aggressive growth in the past few years, the amount outstanding in the industry’s credit card portfolio in August was Rs27,834 crore. This is just over 1% of Rs26 trillion credit extended by the banks in India.
The average monthly spending on cards across the country is between Rs2,200 and Rs2,400, but not every credit holder rolls over the credit. If they clear their entire due within the time frame, banks do not earn any interest on their credit. Nationally, customers that roll over part of their total debt account for about 40% of total users.
The rise in NPAs has made the banks cautious and they have virtually stopped looking for new customers.
Card cancellations, which are typically driven by both defaults on payments and non-usage, are at about 8-12% of the total card base. Banks block a card if payment is not made within 30 days and cancel it if no payment is made for 90 days.
Plastic money: Various Citibank credit cards. The average monthly spending on credit cards in India is between Rs2,200 and Rs2,400. Harikrishna Katragadda / Mint
The interest rate hike earlier in the year, coupled with a reduction in the interest-free period on cards, has led many credit-worthy customers to stop using their plastic. In July, some banks raised their interest rates by 25-30 basis points on credit card loans. One basis point is one-hundredth of a percentage point. Since interest rate on credit cards is charged monthly, a 30 basis points rise translates into a 3.6 percentage points hike in annual interest rates.
ICICI Bank Ltd, the largest credit card issuer in the country with around 8.5 million cards, had in July reduced the interest-free period on cards from 52 days to 48, and started charging some customers interest rates of 3.4%, up from 3.14%.
HDFC Bank Ltd, which has a base of 4.5 million cards, and is the second largest credit card issuer, didn’t reduce its interest-free period, but increased its interest rate band from 2.75-2.95% to 3.05-3.25%, beginning 1 September.