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."
The Banking Ombudsman is not in favour of banks appealing against its decisions; threatens to convert one-off cases into all-encompassing class action suits
Despite not being a quasi-judicial body, but a scheme for grievance redressal, the Banking Ombudsman (BO) derives enormous power from its ability to extend a verdict into a full-blown class action suit. The BO, which is an expeditious forum to bank customers for resolution of their complaints, is known to take a tough stand against gross violations of customers’ rights.
Now, the BO has frowned upon banks that consider an appeal against its verdicts. During an interactive session on banking services organised by Moneylife Foundation on Saturday, Kaza Sudhakar, chief general manager, customer services department of the Reserve Bank of India (RBI) vehemently discouraged banks from appealing against a decision given in favour of the customer. If a bank were to do so, the BO would consider extending the particular complaint verdict into a class action suit, applicable to the entire banking fraternity.
Mr Sudhakar said, “We are absolutely not in favour of any appeal by bankers against decisions taken by the BO. It is simply not expected. If the bank appeals, it is a case for a class action suit—as simple as that. If the appeal is not upheld, you are done.”
He cited the example of a particular complaint against State Bank of India (SBI), where repeated complaints from one customer about delay in pension payments forced the RBI to take a tough stand on the matter. The outcome was that the central bank issued a circular across the banking system, directing banks to make good the payments immediately, along with penal interest to the customers. “It was only that one person who persistently knocked on the RBI’s doors. Because the bank appealed against our decision, we had to scale the issue across all banks.” This resulted in benefits to nearly 65 lakh customers in the country. Moneylife was the only media house to reveal the action taken by RBI against banks delaying pension payments. (see here and here).
While the BO has the power to award exemplary damages in extreme cases, it is not a frequent occurrence. Mr Sudhakar pointed out that almost 50% of the complaints with the BO are non-maintainable due to a variety of reasons. Out of the remaining, almost 70% are resolved within one-two months.
Mr Sudhakar also criticised banks for the increasing number of cases where housing loan documents of customers were getting misplaced at the banks’ end. He said, “We are completely sympathetic towards the customer in these cases. This is simply not tolerable, and we will be harsh on such banks. Loss of housing loan documents is like a permanent defect in title of the customer.”
OP Agarwal, BO for the States of Maharashtra and Goa, was also present during the workshop. He also put in some words of caution for the banks. “We strongly urge banks not to keep the complaints pending beyond an acceptable time limit. Around 70% of the complaints with the BO get resolved within one or two months. In some rare cases, redressal takes more than three months.”
Mr Agarwal also pointed out that banks are required to disclose in their annual report details regarding complaints filed against them. This should include the nature of complaint, award against complaints, time taken for reverting back to the customer, etc.
The recent proposal of the State government to charge 1% for all under-construction properties will be passed on to the consumers, but will the beneficiaries get the money or will it be used for frivolous purposes?
The Maharashtra Cabinet cleared a proposal last Wednesday to charge 1% tax on all private under-construction property, ostensibly for the welfare of more than 20 lakh construction workers. This new tax has to be paid by developers, which means it will be eventually passed on to consumers.
Real estate research and rating firm Liases Foras had calculated that the amount raised under the new tax would be about Rs1,037 crore from the Mumbai Metropolitan Region (MMR) alone, taking into account 17 crore sq ft of under-construction property currently (for the fourth quarter which ended in March 2010) assuming a weighted average price of Rs6,100 per sq ft. There are a number of unsold properties in Mumbai; this new tax will again increase the unsold inventories in the city. The tax is proposed to be levied on both residential and commercial areas.
“Over time, developers may pass on the pressure of the 1% tax on to the consumers and property prices will also rise due to the new tax,” said Sunil Mantri, president, Maharashtra Chamber of Housing Industry (MCHI).
“The tax will be passed on to consumers. The proposed 1% tax on construction cost is not a big amount, but the construction cost is never revealed to consumers. It remains to be seen how the cost will be calculated, collected and used. The administrative work involved would be huge,” said Pranay Vakil, chairman, Knight Frank (India) Pvt Ltd.
The tax collected under this scheme will be used for workers’ welfare like insurance, training and scholarships for children. The Maharashtra Cabinet has set up a high-powered committee for this purpose; it has recommended creating a separate Board to initiate various welfare measures for them.
“Real-estate prices are already unaffordable in Mumbai and another 1% tax will add to the burden of the consumers as they are the ones who have to pay the tax at the end of the day,” said Pankaj Kapoor, founder, Liases Foras.