Mumbai: India’s banks are again quietly raising interest rates on credit card loans. And sticking it in the fine print.
And, this time, instead of going for across-the-board hike, banks are starting to discriminate, using credit history and other segmentation to push some customers into higher rate bands.
For instance, ICICI Bank Ltd, India’s largest private sector lender and the biggest credit card issuer with a card base of around 8.5 million, is now charging many of its customers 3.4%, up from 3.14% just weeks ago. It has also reduced the maximum credit-free period from 52 days to 48 days. Credit-free period is the time given by a bank to a customer to make payments on credit card purchases without having to pay any interest.
The hike in interest rates across banks examined by Mint is 25-30 basis points. One basis point is one-hundredth of a percentage point. Since interest rate on credit cards is charged monthly, a 30 basis points raise translates into a 3.6 percentage points hike in annual interest rates.
An ICICI Bank official said the bank’s interest rate band for credit cards is 1.5-3.4%.
Foreign banks, such as Citibank NA and Standard Chartered Bank, have also started charging their credit customers higher rates within an interest rate band. The interest band of Citibank is 1.49-3.5% and that of Standard Chartered 2.49-3.4%.
HDFC Bank Ltd, which has roughly half of ICICI Bank’s credit card base, is raising its interest rate band from 2.75-2.95% to 3.05-3.25% from 1 September.
Parag Rao, head of product portfolio and service delivery credit cards at HDFC Bank, said: “The increase in interest rates is in line with market. We have not tinkered with the credit-free period as this could have an impact on the repayment of customers.” He also claimed that HDFC Bank’s rates were lower than the market and it has “corrected the disparity”.
State Bank of India (SBI), which runs a credit card joint venture with GE Capital Services, the largest issuer of private label credit cards in the world, said it hasn’t yet taken a decision on interest rates even as Diwakar Gupta, chief executive of SBI Cards and Payment Services Pvt. Ltd, noted that “credit is getting costlier”.
According to Gupta, “the (interest) rates will either remain stable, or move up from here”. SBI Cards’ current interest rate band is 2.6-3.1%.
A rise in interest rates on credit cards does not affect all cardholders as only those customers who roll over some portion of their credit need to pay interest on amounts due. Such customers are believed to make up around 40% of the almost 28 million credit card users in India.
The average spending on Indian credit cards is in the range of Rs2,200-2,400 per month, a relatively low figure by global standards, but one that has been rising in recent years. “The average spend on cards about two years ago was in the range of Rs1,700-1,800 per month,” said an official from a payment company, who didn’t want to be identified because he is not authorized to speak to the media.
Banks typically charge high interest rates on credit card debt as these “loans” are not backed by any collateral. This means that in case of default, banks more often would end up having to write off the loan.
Most banks in India aggressively expanded the credit card base in the past few years by waiving annual fees on cards and aggressively wooing customers as they sought to cash in on rising consumer spending in Asia’s second fastest growing economy.
But with India’s banking regulator raising policy rates and tightening liquidity to rein in inflation, which is at a 13-year high, banks are getting pinched.
“The delinquency levels on banks credit card portfolio have increased in the range of 10-15%, from 5-8% around one year ago. There was an added aggression in the credit card space in India, with new entrants, such as Axis Bank, Deutsche Bank and Barclays Bank, entering this space,” said the same payment company official.
In addition to raising rates, banks are also going slow in adding new cardholders.
SBI’s Gupta said, “Our delinquency level is in the range of 15-20%. We are taking steps towards aggressive collection and also looking at reaching settlements with customers.”
According to him, the environment is getting tough with customers’ disposal incomes coming under pressure. “We are consciously cutting back on sourcing (of new customers) as we have seen the delinquency rate go up in tier II and tier III centres,” Gupta added.
Seeing a rise in its non-performing assets in the credit card portfolio, Axis Bank Ltd, a relatively new player in the segment, has stopped growing the business and is rejigging the portfolio.
“We are now focusing on our existing bank customers. The rising inflation has hard hit customers who borrowed money to enjoy a vacation, or sundry purchases,” said Hemant Kaul, president (retail banking) at Axis Bank.
Sandeep Bhalla, business manager (cards) at Citibank, also agreed that the macro-economic environment and inflation have made credit card funding costs more expensive and delinquencies, too, have been on the rise.
“Even so, we are maintaining the majority of our cardholders at their current rates,” Bhalla said. “At times, with changing market conditions and customer behaviour, a selected few customers may also see some upward movement in their rate.”
R.L. Prasad, head of credit cards and personal loans at Standard Chartered Bank, said the industry is witnessing stress in some segments where customers may have been over-leveraged. “Overall, profitability of the industry has come under pressure due to several factors, including erosion of annual fees, margin compressions, and funding and rising credit costs.”
Rating agency Crisil Ltd, in its report titled Retail Assets a Case for Caution, Not Alarm, released early this year, said there has been a deterioration in asset quality of personal loans and credit cards receivables. Crisil expects a further decline in asset quality of these portfolios on account of “over-leverage by customers and the entry of players in under-banked geographies”.