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.
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.
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
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.
Citibank NA, the third largest credit card issuer with 3.8 million cards, has an interest rate band of 1.49-3.5%, based on the customer’s credit history. It has also tightened its business sourcing, and is marketing its cards only to bank customers.
SBI Cards and Payment Services Pvt. Ltd, a joint venture between State Bank of India and GE Money, has hiked the interest rate from 2.6-3.1% to 3.35%.
A senior executive at a payment company, who does not want to named as he is not authorized to speak to the media, said banks have stopped soliciting business from the open market.
While the rejection rate of new applications continues to be in the range of 30-35%, banks are not growing their credit card base aggressively, particularly in the basic card segment, the executive added.
A senior executive of ICICI Bank, India’s largest private sector lender, said the bank has “developed credit scores for customers based on Cibil data and the customers affordability index”. The affordability index is arrived at after assessing the loans the customer has taken from various financial institutions. This helps banks gauge the customers repayment capacity.
Cibil is a credit information bureau that collates the credit history of individuals and assigns so-called credit scores, which banks use before they sanction a loan/credit card to a customer.
“As per the contract signed between the bank and the customer, if the credit score of the customer falls below a particular level, the bank reserves the right to reduce the credit limit,” the ICICI Bank executive, who did not want to be identified, said.
“If a customer was to apply for a card today, his credit limit would be 30% lower than what it would have been if it was sanctioned one year ago. This is called account management. We will focus on consolidating our card portfolio and account management,” said the bank executive.
According to the payment company official, banks have started reducing cash limits available on cards even though the overall credit limit of a customer remains the same.
“They are reducing the cash limit as customers that hold multiple cards use the cash available on the card to pay their monthly dues,” he said. “This in the long run will increase the debt burden on the card holder and the chances of default rises.”
Rising defaults have also forced banks to revise their eligibility criteria upwards. The entry level annual income for new customers of basic cards, like blue and silver, has been hiked from Rs60,000 to Rs1.5 lakh. For gold cards, it has been raised from Rs1.5 lakh to Rs2 lakh. The credit limit of a gold card customer is higher than the basic cards.
Diwakar Gupta, chief executive officer, SBI Cards, said: “We have revised the income threshold limit like the other players in the industry. Earlier, it was around Rs1.5 lakh. It has now been increased to Rs2 lakh. We have also hiked the interest rate on credit cards for those customers who revolve credit need to 3.5% from 1 October.”
SBI Cards’ NPAs on a credit base that has remained flat at 3 million have been in the range of 15-20% since December 2007; the bank is now focusing on recovery, in addition to launching new products.
“In the next six months, we will reposition our product offering. There will be basic, no-frills card which will attract no annual fee, however, the gold and the platinum offering will come at a fee. We will source 50% of our new business from State Bank of India and other bank customers with whom we will launch co-branded cards,” said Gupta.
Axis Bank Ltd, a relatively new entrant in the credit card market with about 500,000 cards, has also made its underwriting practices tougher. “The bank has increased the threshold income level from around Rs60,000 to around Rs1.5 lakh,” Hemant Kaul, executive director at the bank, said. “We are marketing the credit card to bank customers only.”