Indian Credit Card Holders Should Expect Annual Card Fee’s
Indian credit card issuers that have been lobbying for an end to the cap on penal rates of interest are upgrading existing customers to platinum or titanium cards. Card issuing banks are doing this in the eventuality that the Supreme Court upholds the National Consumer Disputes Redressal Commissions decision to cap interest rates at 30%.
The Supreme Court of India had earlier deferred making a decision on the legality of commission’s directive, choosing instead to seek the RBI’s response first. The RBI is India’s central bank, determining monetary policy and acts as India’s banking regulator. The Supreme Court is expected to deliver a verdict in the next few days.
If the Supreme Court upholds the directive, credit card issuers will be left with little alternative but to either increase their annual fees, or introduce them in cases fees had waived in the past. Banks had previously compromised on credit quality and were facing above average delinquencies on unsecured lending such as personal loans or credit cards. In order to compensate, penal rates of interest rates were being charged of up to 50% and ordinary rates were not much lower. The commission had effectively ended that practice with its ruling, and the banks as a result primarily multinational ones, formed an industry lobby and appealed this decision to the Supreme Court.
If Interest rates are indeed capped by the Supreme Court, card issuing banks will start charging hefty fees to recoup some of the losses they have incurred in the past from lending to laxly. The banks had argued that their cost structures required them to charge what the commission viewed as being “excessive penal rates of interest”.
Banks have begun upgrading their customers into platinum or titanium card holders in anticipation that the Supreme Court would rule against them. Platinum and Titanium cards carry annual fees for which the holder receive some undefined benefits, depending on who the issuer happens to be. Banks have been wary of pushing annual fees on existing customers for fear of losing them altogether.
Banks Say They Cannot Make Money
Foreign Banks argue that that the credit card business is unprofitable in India if interest rates are capped, due to high administrative costs and small transaction sizes. The average Indian credit card transaction is Rs. 1,500 or US$32 with default rates being higher than international norms.
Some banks have suggested that higher interest rates result in less miss selling and raise the entry barrier. This claim is perhaps more than a little dubious, many banks issue credit cards to customers with less than Rs 150,000 or US$3,250 in annual income, and previous practice was to issue credit cards to bank customers unsolicited, in order to give a boost to numbers and therefore lending. That practice has largely ceased because the RBI banned it and made issuers liable for all outstanding charges on cards issued in such a manner. It would be naïve to think that high rates of interest are some kind of barrier to spending. Individuals given access to credit when previously there was none, will spend regardless. Once they learn the true cost of credit, they may cease to do so, but if they default on their existing obligation, then the damage to the lender has been done.
The default rate on credit card debt stands at over 8%, some estimates put it as high as 15% and the rate apparently has been steadily increasing, largely due to the practice of issuing cards for free. The industry lobby, which appealed the commission’s decision to the Supreme Court, comprised of Citibank, HSBC, Standard Chartered Bank and American Express Bank. The Lobby argued that “capping of interest rates on credit card payment was contrary to the Reserve Bank of India policy giving banks the freedom to fix rates on non-priority sector personal loans, regardless of the loan size.”
Lots of People Means Lots of Customers
Citibank has over 3.7 million credit card customers in India whilst HSBC has 2.8 million. HSBC does in fact levy a fee of between Rs 750 to Rs 4,000 (about $16 to $85) annually ICICI Bank charges a minimum annual fee of Rs1,500 ($32) depending on the type of card being held. ICICI Bank had recently announced at the start of last month that it was waiving all fees on all non cobranded cards. That will obviously have to change if the Supreme Court rules against the Industry lobby. Read our recent blog post - ICICI Bank Credit Cards Introduce No Annual Fees on Selected Cards
The numbers of credit card holders in India is actually feeble when you contrast it with the population of the country. India has a population of well over 1.2 billion, granted only a quarter of the population is defined as being middle class. The banking lobby’s claim that a potential market of 300 million people is simply unprofitable without charging extremely high rates of interest must be met with a fair degree of skepticism. If lenders find it hard to make money lending small amounts of money, to large numbers of people, at reasonable rates of interest and maintain credit quality whilst they do so, then perhaps they should not be in the be in the business in the first place.
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[...] 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” [...]
[...] For a more detailed discussion on the arguments the banking industry lobby is making and what it intends to do should it lose the case see previous post “Indian Credit Card Holders Should Expect Annual Card Fee’s” [...]