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IDFC First Bank has launched its credit card business and plans to charge customers interest rates as low as 9% on the outstanding credit. Depending on the customer’s credit profile, the annual percentage rate (APR) would change and go as high as 36%.

“Being a late entrant in the credit card market, we have to differentiate ourselves. We developed a complex scoring mechanism with a dynamic interest rate. Depending on customers’ scores, we will decide the interest rate," said B. Madhivanan, chief operating officer, IDFC First Bank.

The bank will first offer cards by invitation to its customers. In February and March 2021, it will start accepting applications from its existing customers. Those who are not existing customers can apply for a card April onwards.

The bank also plans to move away from the industry practice of levying high charges on cash withdrawal from credit cards. Most issuers charge interest rates from the first day of the withdrawal. IDFC First Bank will charge a flat fee of 250 and offer up to 48 days of interest-free period on cash withdrawals.

People familiar with the industry said other card issuers could follow IDFC First Bank, where customers with better credit profiles would pay lower interest rates. “We have seen the trend in loans. The same could happen in credit cards," said Pankaj Bansal, chief business development officer, BankBazaar, a marketplace for financial products.

credit card RATES

The high interest rates that banks charge on credit card outstanding balances are a result of higher risk in the business that was present earlier. According to experts, the delinquencies were high earlier, which made credit card a riskier business compared to other products.

But delinquencies have come down now. “Around a decade back, non-performing assets of 6% were considered normal in the credit card business. For most banks, the NPAs are now at 2%," said Madhivanan.

Delinquencies have come down due to credit bureaus becoming more prevalent. To maintain a better credit profile, a lesser number of customers default now. Frauds, too, are much lower because of credit bureaus.

However, most issuers continue to charge around 40% APR on outstanding credit card balance. Overall, credit cards remain riskier than other products. “In a personal loan, lenders take post-dated cheques. They can go to court and file a cheque bounce case. In the case of cards, issuers cannot take such steps for recovery," said Sahil Arora, director, Paisabazaar, a marketplace for banking products.

At present, 70-72% cardholders don’t revolve their outstanding. “Once a person starts revolving credit, the chances of delinquency increase. As 28-30% of customers revolve their outstanding balance, banks charge higher rates to cover risks," said Bansal.

Some banks also offer credit cards against fixed deposits (FDs). Despite “secured" cards, with lower chances of default, the rates charged are on the higher side.

new APPROACH

Unlike in the developed markets like the US, credit cards in India are not a tool for credit. They are used as a convenient mode of payment. IDFC First Bank wants to change this approach. It is treating cards as a means of credit

“When interest rates are high, savvy customers won’t revolve outstanding balances. But if the rates are similar to a personal loan, they might occasionally revolve for a month or two during emergencies or when making planned purchases," said Madhivanan.

This way, the bank can earn interest from the customer who doesn’t otherwise prefer to revolve outstanding. At the same time, the cardholder gets access to credit at interest rates similar to personal loans.

Personal loans have an application process which takes some time, whereas credit cards provide a credit line at the customer’s disposal. For these reasons, the bank is treating cash withdrawal as a short-term loan.

The APR of 9% will most likely be for an existing customer of IDFC First Bank. It is easier for the bank to evaluate the credit profile of an existing customer who has been banking with it for some time. For those who are not customers of the bank, the APR will be higher, said Madhivanan.

The bank has created a proprietary scoring mechanism to evaluate customer profiles and offer interest rates based on the scores. “With credit bureau data and newer technologies to analyze profiles, it’s now easier to segment customers," said Madhivanan.

WILL OTHERS FOLLOW?

In recent years, fintech companies have managed to disrupt customer payments and loans systems. But to do the same in the credit card business is tougher. Card business is highly regulated and riskier than other products.

However, experts feel that other banks could follow suit. “In the past, card penetration has been low in the country. It’s now at around 3%. But the adoption has been rising due to the covid-19 pandemic, growing e-commerce sales and a higher number of point-of-sale installations at merchant sites. This could be the tipping point, where banks may offer new products and lower rates as demand grows," said Arora.

He said before IDFC Bank First Card, even Yes Bank had offered lower interest rates on its YES FIRST Exclusive Credit Card, where the interest rates were 12-15%.

Expect some banks to offer cards as a credit product instead of a means of convenient payment.

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