Business

A Gentle Swipe

As the credit card economy grows, the RBI issues fresh guidelines for card firms

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A Gentle Swipe
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In the past 3-5 years, several summits organised by the industry have by and large celebrated India's growing economic prowess and the country's fast-changing consumer demographics. In fact, none of these summits or seminars have been complete without any glorious references to three of the fastest growing products that characterise the new "superpower" India—mobile phones, automobiles, and credit cards. But now, a cautious Reserve Bank of India (RBI) fears that the fairy tale run in one of these products—credit cards—may take an ugly turn if the indiscriminate, unregulated proliferation of plastic money continues.

Late last month, the RBI came out with strict guidelines asking credit card issuers to be conservative in selling their products and to ensure transparency in their dealings with the customers. The problem is that the aggressive marketing of credit cards has led to a situation where the issuing banks are becoming lax in judging the creditworthiness of their customers, thereby leading to higher defaults. If this trend continues unchecked, the RBI feels that it may lead to a delinquency crisis similar to the one witnessed in Australia in the 1980s, when the credit card arms of several banks incurred huge losses.

The best way to look at the current situation is through statistics. By the end of 2005, India will have more than 14 million card users—nearly a three-fold increase since 2000. Before this calendar year runs out, customers may end up spending a whopping Rs 22,500 crore through their credit cards, or a 25 per cent increase compared to the previous year. So far so good. But the worrisome figure for the RBI is that the default rate is also a scary seven per cent, compared to the global benchmark of a modest two per cent.

"The problem starts when banks start selling credit cards like biscuits, toothpastes or soaps. In their quest to seek a higher customer base, they have been issuing cards without keeping in mind the target customer," says Vijay Mehta of Credit Card Management Consultancy, an agency that monitors the industry. While card companies and banks seek to bring in newer, more vulnerable consumers like students and salaried employees from the sec B and C categories into their fold, the risk factors also increase. "When these new consumers do not understand how the system works, it leads to higher defaults and customer harassment," Mehta adds. The fact that the credit card arms or firms operate almost like fmcg companies is clear as the former are among the biggest recruiters on B-school campuses in the country.

Obviously, the first step in reducing defaults is to curb the growing practice by banks of handing out unsolicited and pre-activated credit cards. The new regulations state that such cards simply cannot be issued. "In case this is done without the consent of the customers, who are also billed for the same, the card-issuing bank shall not only reverse the charges forthwith, but also pay a penalty without amounting to twice the value of the charges reversed," stipulate the new rules. Also, banks cannot raise or lower the credit limits without the prior consent of the customers.

In addition, the RBI thinks that aggressive marketing has resulted in poor customer services. Consider the example of Meenakshi Raman, a Chennai-based central government employee, who was fed up with her mounting card bills. She sold some of her jewellery to pay the debt and surrendered her card. To her surprise, she kept receiving billing statements for a card she no longer owned. She was constantly harassed to pay the "outstanding" sum. Finally, her agony ended after several visits to the issuer's office. Such instances have almost become a norm in the credit card segment.

However, the new RBI guidelines hold the banks responsible for such omissions, even if it's due to their direct selling and recovery agents. To further help customers, the RBI has suggested that banks should highlight the most important terms and conditions (MITCs) such as annual fees, charges, withdrawal limits and billing details in simple language. It has also asked the banks to be more explicit with the annual interest rate on credit cards, which can be as high as 40 per cent, instead of couching it by saying that the monthly interest rate is 1.5-3 per cent.

T.R. Ramachandran, business manager (cards), Citibank, says that his company was providing such basic information along with the monthly statements even before the recent RBI guidelines came out. But he cautiously admitted that "although the banks may have communicated with their consumers, the statements would be couched in legalese which would not be understood easily by the card-holders." Adds Roopam Asthana, CEO, SBI Cards, "The various initiatives will ensure a regulated, healthy and efficient growth of the credit card business in India."

Or, will the new guidelines slow down the astronomical growth rate in credit card culture? Citibank's Ramachandran does not think of them as a negative or as a rap on the knuckles of credit card companies. "It is in fact more a sign of self-regulation as the guidelines were framed by an RBI working group that comprised representatives from several credit card companies. It would also be unfair to say that banks have been indiscriminate in issuing credit cards. There are 27 million taxpayers in India, but only 14-15 million are card-holders," he says.

Industry sources point out that the new rules may remove the biggest hindrance to the growth of credit cards business in India. "There has been a lack of understanding of the way this product operates. Some of these guidelines will actually assist consumers in getting more information in a standardised format from different issuers. This will increase consumer confidence in dealing with credit cards and help remove some of the misunderstandings that customers have about the product. This can actually encourage the fence-sitters to opt for credit cards," says SBI Cards' Asthana. And this will help the card firms.

Due to lack of education, many consumers feel uncomfortable while using their cards on a regular basis. In fact, only 40 per cent of the 14 million cards are actively used. "The unused cards are becoming a major expense for banks as the cost of issuing a card can be around Rs 1,500, taking into account the cost of customers' acquisition, processing applications and issuing the cards," says a Delhi-based industry source.

Another advantage that's likely to accrue to card firms is that the new RBI rules may strengthen their operations. "In their quest for increased revenues and more customers, the card firms that offer cash-back on purchases and assorted gimmicks are likely to suffer in the long run. They have to understand that unlike the US, India does not have a credit culture and the repayment capacity of Indians is still very small," says Mehta. Therefore, going slow on issuing cards may prove to be a boon in disguise.

However, credit card sellers like Citibank feel that the RBI has taken a few steps in the right direction. The banks blame higher default rates in India on the hitherto lack of a centralised credit bureau. For instance, till recently, a customer who had defaulted on his home loan payments could easily approach another bank for a credit card, which obviously increased the chances of his defaulting on the card payments as well. Now, with the formation of the RBI-approved Credit Bureau Information Limited, which helps bankers to screen defaulters and allows them to ascertain a customer's creditworthiness, both delinquency and NPAs (non-performing assets) are expected to come down. Hopefully, the Indian credit card story will continue with satisfied and happy card-holders and profitable banks.

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