Banks plan to slow down credit card biz in smaller towns

Aftershocks of the US sub-prime lending crisis Indian banks have started going slow on the credit card businesses across the board in tier-I and tier – II cities due to a big increase in default cases during the last six months.

A senior banker informed Sunday ET that alarming increase in number of failure to pay debts is leading to card holders and collection agents conspiring to misuse credit cards india. “We recently had a case where one of our collection team agents was hand-in-glove with a card holder. It was an eye-opener in more ways than one,” the banker said.

To put a check on the rising consumer defaults and keep the situation under control, Indian credit card companies have become strict with card issuance and are also reducing credit limits for card holders with high debt burden. Credit card firms are now adopting newer ways — such as reducing credit-free limit period from 52 to 48 days and charging a fee on cash payments at bank branches for credit card dues — to recover the transaction costs. Banks have also started making reminder calls (a week before the due date) to their card holders in case the due amount is a significant sum and to make sure that the default numbers don’t rise anymore.

Here is an example how the collection agents and card holders are conspiring misuse of credit cards.

Mr A (card holder) discarded multiple credit cards after utilizing the credit limits, with the help of Mr B (a senior collection official) to whom he paid a relative sum of credit card limit. Mr B, on his part, rescued him by sitting on the fraud case, and finally closing the case mentioning no breakthrough.

This is the main reason why the latest Reserve Bank of India (RBI) figures on the credit card industry doesn’t surprise. During the January-May 23 periods this year the credit card out standings went up by an enormous 87% at Rs 26,596 crore, from Rs 12,375 in the year-ago period. As per industry analyst report the banks are responsible for the current state of affairs.

“The eagerness to grow business at a fast pace is now backfiring on them. The profitability of the credit card business depends on the right ticket size and the average spends. There is a transaction cost involved with the whole retail experience. Monthly statements, collection costs, and other costs are high in case of credit cards. Initially, the banks strategy was to increase volumes, rather than focus on ticket size. Thus, individuals of small ticket size were issued credit cards, and average spends resulting were smaller than expected,” the analyst said.

The analysts are of a view that in the future there will be increase in the problems of credit card companies with the increase in customer defaults in future. “Rising inflation, volatile markets, and skyrocketing crude oil prices have only grown concerns of increased credit card defaults that could dampen the industry earnings,” the analyst pointed out.

Shameek Bhargava, director & head of cards — Asia-Pacific, Deutsche Bank, told Sunday ET that it is not surprising to see increase in defaults and they had predicted it. “We saw it coming. The industry was bound to witness higher delinquencies in credit cards, as some banks were putting tremendous pressure on their sales executives by setting atrocious sales targets. We, however, are not affected majorly and our risk costs are far better than other banks, as we have always focused on the segment where the risk-adjustment deal makes sense,” he said. Currently, the German bank is not having a branch operating in tier-II and tier-III cities in India.

Due to overall economic downfall the businesses are also going through downfall therefore, Bhargava supports the move by banks of levying charges on cash payments at bank branches for credit card dues.

“We are following an industry trend. We have provided customers with different types of payment options, like drop boxes, which we would like them to use.” According to Sachin Khandelwal — head of cards group, ICICI Bank, banks have updated their technology and are providing their customers with an e-platform to improve their cost-benefit ratio. “There is a very small percentage of card holders who pay in cash. We want to encourage transactions via electronic systems and the auto debit facility, which is not only paper-less but also less time-consuming,” he said.

Recently bank has introduced a charge of Rs 100 for paying credit card bills in cash with effect from June 1, 2008. According to HDFC bank official levying a charge on paying credit card bills in cash at a bank branch, is a step in the right direction for the industry. “This will encourage customers to use the online platform, which is the future and have been put in place for their convenience. “ the official said.