Taking moratorium may hit your credit card limit | Mint
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Business News/ Money / Personal Finance/  Taking moratorium may hit your credit card limit

Taking moratorium may hit your credit card limit

Banks are lowering the limits on credit cards or blocking them for certain customers
  • Card issuers start reviewing their portfolios in times of economic stress more aggressively to cut down risk
  • Cardholders who have made irregular payments in the past may see a higher impact on their credit lines (Photo: iStock)Premium
    Cardholders who have made irregular payments in the past may see a higher impact on their credit lines (Photo: iStock)

    Since the middle of April, scores of credit card customers—those of Axis Bank Ltd and Kotak Mahindra Bank Ltd being the most vocal among them—have taken to Twitter to complain to their banks about a sudden reduction in their credit card limit. Some cardholders have seen their credit limits reduced by up to 80% over the past week or so. Some said the limit was reduced because they opted for a moratorium on their cards, but others said they were affected even though they took a moratorium for their personal loans but paid their credit card dues on time. Then there were those who said their cards were blocked even though there were no outstanding dues against them. So what’s happening?

    Though customers are linking this with the ongoing financial crisis due to covid-19, according to banks, this is a regular and ongoing exercise. “Analysing creditworthiness and card spend behaviour of credit card holders is our regular, ongoing exercise and is not unique to the current period. Based on credit card spends and repayment data, we analyse credit limits of customers, and offer to increase or reduce the credit limit, depending on the case," said Ambuj Chandna, president, consumer assets, Kotak Mahindra Bank. Mint’s email sent to Axis Bank remained unanswered till the filing of this report.

    But some of these actions may indeed be linked to the current financial crisis. According to intermediaries, banks are reviewing customers on risk parameters given the current scenario. “As economic activity has halted, all issuers are reviewing their portfolio and taking immediate action where they feel the risk is higher," said Pankaj Bansal, vice-president and head, key account management, Bankbazaar, an online marketplace for financial products.

    Growth in credit card outstanding
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    Growth in credit card outstanding

    Who is hit?

    Typically, credit card issuers start reviewing their portfolios in times of economic stress more aggressively to cut down the risk. They consider different parameters to check if any segment of their portfolio could be under stress, and identify customers accordingly.

    Those who are financially vulnerable: Banks feel that some segments of their consumers can come under more stress than others in the current situation. They are, therefore, reducing the limits to curtail spends on consumers on cards. “Self-employed customers, especially those from sectors like travel, holiday, entertainment and so on, may be impacted. In the salaried segment, consumers employed with these heavily impacted sectors or relatively smaller organizations, where they may be more at risk of facing job losses or financial difficulty, in the bank’s view, might see their limits reduced," said Naveen Kukreja, co-founder and CEO, Paisabazaar.com, an online marketplace for loans and cards.

    There are many customers whose credit limits are intact, but banks have either reduced the ATM cash withdrawal limit of their credit cards or withdrawn the facility altogether. The cash withdrawal limits vary among customers. “The charges on cash withdrawal on a credit card are high. If someone uses this facility, he would be financially very stressed. Banks don’t want such cardholders to get into a debt trap as they can turn into non-performing assets (NPAs)," said Gaurav Chopra, founder and CEO, IndiaLends, an online marketplace for financial products.

    Those with risky profiles: Banks also segment their customers by different risk profiles. Cardholders who have displayed an irregular payment pattern in the past are considered to have a relatively higher credit risk.

    About 65-75% of cardholders pay their dues on time, but around 25-35% of them revolve their credit card outstanding or pay only a small percentage, according to industry estimates. Such customers are most likely to see a higher impact on their credit lines. If someone has a limit of, say, 5 lakh with dues of 3 lakh and has been paying only a small percentage of the outstanding, banks could reduce the limit of such cardholders. “In times of stress, if such consumers spend more on their cards, it’s likely that they won’t be able to pay even the minimum amount due as interest would keep mounting. They are more likely to turn into an NPA," said Chopra.

    Those who have opted for moratorium: Some issuers have started blocking cards of customers who have availed of the moratorium on outstanding repayment. Blocking the credit cards temporarily of such people can be a part of banks’ strategy to contain the risk of increased NPAs after the moratorium period. “It is a conservative risk management approach and might suit the interests of both the cardholders and the concerned banks. As credit card debt comes with high-interest rates (over 40% a year), blocking the card might save those cardholders from accumulating ballooning credit card debt," said Kukreja. But this is not a standard practice. Banks are doing it on a case-to-case basis, according to intermediaries.

    Customers who have availed of moratorium on their personal loans are also seeing their cards blocked for the same reason. Opting for moratorium on personal loan means the customer has cash flow problems.

    Those at risk of fraud: Many customers could have a high credit limit but use only a part of it. A cardholder, for example, may have a 2 lakh limit. But for the past 12-24 months has been using only 10,000-20,000 a month. Banks have started reducing the credit limit on their cards to prevent any fraudulent usage even if they were regularly repaying in full.

    Those with changing spends: Banks also study the spending of consumers and categorize their spends. During the lockdown, the only item where most consumers are spending is groceries. “If most of the spending of a customer comprised of eating out and watching films, banks can curtail the limits, as they won’t be using the card for now. Once restaurants and multiplexes open, issuers could restore the entire limit," said Bansal.

    Who benefits?

    Banks are indeed cutting down limits to curtail risk, but they are also asking low-risk customers for limit enhancements. Typically, these are banks which primarily issue cards to those with whom there is an existing relationship.

    A low-risk customer is, typically, someone who has been using over 50% of the credit limit during some months and clearing the dues on time. Say, there is a customer who has a 1 lakh limit, spends around 60,000 and repays the money on time. “Banks may decide that this customer may not default, and will continue spending. They can offer to raise the credit card limit for such customers," said Chopra.

    A low-risk customer may also be someone who has a fixed deposit or a salary account with the bank. The issuer knows that it can deduct the money from an existing account if they don’t pay. In the fine print, banks usually mention that they can freeze accounts or deduct money in case of non-repayment.

    The limit on your card could be reduced for different reasons. However, in most cases, such actions can help you stay away from a debt trap.

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    Published: 27 Apr 2020, 11:11 PM IST
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