RBI show signs of worry over rising credit card defaults

Banks are raising interest rates and customer’s financial position is getting weak. This has resulted in defaults in the credit card segment. RBI deputy governor V Leeladhar said on the sidelines of a banking conference the rising credit card defaults in the country is a matter of concern.

When deputy governor was asked about the practice of some banks who issue cards without checking the credit worthiness of their customers said, “Defaults are going up. It’s a matter of concern”.

According to RBI reports credit cards out standings have gone up by a enormous 87 per cent, or Rs 12,375 crore, to Rs 26,596 crore during the year ended May 23, 2008. The report said the downfall in credit card out standings is happening at the time when growth rate in all other segments of personal loans, including housing, consumer durables and advances against fixed deposits, moderated during the period. On Tuesday RBI in its quarterly policy review, stressed on the need to improve the credit quality of banks via stricter credit appraisals.

Recently RBI issued a circular in which banks have been asked not to charge excessive interest rates on personal loans and small advances, including credit cards, and prescribe a ceiling rate on such loans with an aim to control the unchecked practice among banks to hike the rates frequently without valid reasons. Currently banks are charging 40-49 per cent per annum interest rate and in case the card holders fail to make full payment on the due date or pay the minimum amount due, which is almost four times that of housing loan rates – currently at 10.45-11 per cent.

Crisil pointed out in its report that unsecured loans, which consist of personal loans and credit card receivables figure out approximately one-fifth of the total out standing retail loans as on March 31, 2008, up from 6 per cent on March 31, 2004. Therefore the ultimate losses on these receivables are mostly higher than those in the secured asset classes.

With the rising interest rates in the unsecured loans segment (mainly credit cards), the exposure to low-income customers is steadily increasing. Currently loss levels in the low-income customer segment are estimated in the 7 to 9 per cent range. According to Crisil reports a further decline in asset quality can be seen in the segment, due to seasoning in portfolio, over-leverage by customers, and the entry of players into under-banked geographies. The loss levels can be in the 12 to 15 per cent range over the medium term.