About 80% of users of credit cards in India do not pay any interest to banks, by using the grace period, reveals a senior RBI official

Ever wondered why there are fewer calls from telemarketers offering you a platinum, lifetime free credit card? It has nothing to do with the Do Not Disturb (DND) facility from telecom operators. Credit cards have become unprofitable, especially after various banks suffered huge delinquencies in 2005-07, the boom years. Since the bankers or card issuers are not earning much money on credit cards, you now have to really struggle to get one.

Speaking at a seminar on banking services, organised by Moneylife Foundation, Kaza Sudhakar, chief general manager, customer services department, Reserve Bank of India (RBI) said, "Earlier there were complaints that I don’t want a credit card, now there are complaints that I am asking for a card and banks are not giving one. That’s because credit cards are not a profit-making business. Banks are losing money on credit cards."

On an average, there are higher interest rates associated with credit cards—ranging from 1.5% to 4% per month. However, this has not deterred people from opting for a credit card, simply because it gives a user the much-needed flexibility to repay. Credit cards also come with a grace period, where the user can pay his credit card balance in full within the specified time period which can go up to 45 days.

"There may be higher interest rates associated with credit cards, but about 80% of people don’t pay interest charges on a credit card (They may be using the grace period smartly, thus avoiding interest),” said Mr Sudhakar.

According to reports, there are about 26 million (2.6 crore) card users in India with an average person’s wallet containing at least one debit and credit card. However, out of these cards, only 50% are active or in use. Out of the active users almost 80% or about 1.04 million (10.4 lakh) users are not paying any interest on their credit cards, leaving all the issuers with just 260,000 (2.6 lakh) users from whom they can earn some money.

A few years ago or before the 2008 recession, people used to receive a lot of marketing calls for credit cards, free for life from any annual fee. Now the trend seems to have reversed. With the slowdown, many people defaulted on their credit card payments. Usually, during a slowdown, the number of defaults goes up rapidly. However, people don’t default on their home or car loans, since there is a danger of the creditor taking possession of the collateral. However, the same is not true for a credit card. Even if the user defaults on his credit card payment, the recovery takes much more time.

According to media reports, India’s second largest lender ICICI Bank Ltd has closed around 1.5 million credit card accounts, thus reducing the number of its total credit card users to 7 million. Other card issuers like State Bank of India, HDFC Bank Ltd, Citibank, HSBC and Standard Chartered Bank are also following the same route, but nobody likes to talk about it openly.

On the other hand, the number of debit card users is increasing. “We are seeing a shift in consumer behaviour as debit cards take on a greater role in everyday spending. More places that were traditionally cash only—from rail operators, to restaurants to retailers—are now accepting payment cards, so consumers can enjoy convenient access to their funds by using their debit cards with a level of control and protection not offered by cash,” said Uttam Nayak, country manager, South Asia, Visa.

Echoing the same sentiment, Piyush Khaitan, managing director of transaction management company Venture Infotek said, “Banks are going slow on credit card issuance and have been promoting spends through debit cards by offering various incentives to consumers such as loyalty rewards, discounts by select retailers and cash-back options. The increasing acceptance of debit cards at both physical and online merchants is also driving spends through debit cards."