The Hindu : Credit cards: Compounding woes

Online edition of India's National Newspaper
Sunday, Sep 29, 2002

Business

Business

Credit cards: Compounding woes

By C. R. L. Narasimhan

Charging an usurious rate is just one of the undesirable aspects of the plastic culture.

The popularisation of the credit card usage has been attributed to two factors. One, the banks and the card issuers feel there is a huge opportunity in tapping the burgeoning middle-income group. Second, from the standpoint of consumers, credit cards or plastic money, as it is called, is an instrument of convenience. Both the assumptions are valid, but the increased use of cards in India is fraught with certain risks, now being recognised in the West. If due attention is not paid to those in India at this stage, there could be serious consequences for the financial system.

The risks are in fact very basic to any finance business. Simply stated, a credit card user ought to have a standing or credit worthiness to be eligible for a card. Bankers admit that there is no mechanism of credit information on individuals in India, although a few pretend that they have a "complete dossier'' on problem cardholders. An exercise to determine a candidate's suitability is largely superficial. Imported lock stock and barrel from the West, some of the assessment forms and procedures deceive more than they clarify. More so at a time when banks and card issuers are in a race to add to their list of cardholders.

The credit card usage has grown exponentially at a time when the mainline financial system is tracking consumer spending as an area for high business growth. Even though just about one per cent of the country's population have credit cards, that number is large enough to warrant a review of the credit card in its entirety. Its use in by no means benign as many cardholders will testify. Specifically the interest rate charged in India on card outstandings is 2 to 2.5 per cent per month or 30 to 36 per cent annually. Unless a credit cardholder settles within the due date, he will have to bear compound interest and that too from the date the purchase was made. Recently very senior Finance Ministry officials have pointed out the usurious nature of this form of bank finance. Bankers, especially the foreign ones, blithely dismiss such a line of questioning: the delinquency rate in India is high they say. Simply put it means that the banks charge a stupendously high rate because a sizable portion of the cardholders (whom they had assiduously wooed) will not pay up. Others will therefore have to compensate the banks and issuers. Otherwise it will not be worth their while to be in business.

Banks are entitled to such bizarre logic, but are they guilty of hyping a product which they know is defective in a business sense? Have they educated their consumers on the pitfalls of card usage? Unless the card holder piles up a bill and carries over his payment to a distant date, the bank is not going to get that extra income, which alone will make a commercial success of a distinctly risky business. The country head of an international bank says that the proportion of non-recoverable loans (card outstandings) in India is about the same as in many other countries. Although no precise figures were given it is claimed 5 per cent of the turnover from cards has to be provided for. Here the uniquely inhibiting factors in India — the vast spread, the low level of technology penetration, absence of speedy legal procedures for recovery — make the problem far worse than in say the U.S. Public sector banks, especially, which have latched on the card business, have much more to lose. Their mindless imitation of foreign banks has the potential for unmitigated disaster. Spurring consumerism is not part of their ethos and with their far-flung network recovering their dues is a challenging task. In the West influential regulators and commentators have already recognised the dangers that the credit card business can cause to their financial systems. Recent reports say that banks and other card issuers who have aggressively pushed card usage are being penalised, either through a lower rating or monetary penalties. For us in India the biggest worry is sociological: how to educate the middle class from avoiding the pitfalls of brazen consumerism.

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