Credit Card Interest Set to Increase or Limits To be Slashed
The credit crisis has had the effect of causing a rupee liquidity crunch in India in spite of very little Indian exposure to the international credit markets. This has had a negative effect on unsecured loans and credit card debt. Most lenders are charging higher interest rates (though for now a cap is in place) and they have been reducing their credit limits on existing accounts.
Card issuing banks normally operate within a band when charging interest and the liquidity crunch has meant that these bands are expanding outwards which has the result of higher effective rates of interest for the consumer.
Two major credit card issuing banks have increased their interest rates recently; SBI has increased the upper end of its monthly interest rate from 3.31% to 3.35% whilst HDFC has revised its upper rate to 3.25% from 2.95%. These are monthly interest rates and before making any decision based on those quotations, consumers should check with the issuer what that monthly rate works out to in terms of APR (annual percentage rate). A 3.5% monthly rate of interest for example works out to approximately 42% a year.
The RBI, India’s central bank remains hawkish on inflation, a depreciating Rupee doing very little to alleviate inflation in spite of commodity prices moderating over the last quarter. There is a fear that official interest rates will be tightened further despite a lack of Rupee liquidity causing cash rates to spike as high as 20%. The RBI must manage twin objectives which conflict with one another, of ensuring there is adequate liquidity in the market whilst trying to control inflation.
Rising interest rates mean that lenders feel threatened that their market share will be eroded as consumers seek alternative financing options. Most card issuing Banks have revised their interest rates at least twice in the last six months and will refrain from doing so again in the immediate future, preferring instead to reduce credit limits rather than scare of customers who may balk at the high rates of Interest. It has to be said that for now there are limits on the rate of interest credit card lenders can charged and it likely that The Supreme Court of India will side the National Consumer Disputes Redressal Commissions decision to cap interest rates at 30%. And rule in its favour. For more information check out our “Indian Credit Card Holders Should Expect Annual Card Fee’s” post.
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