Rising credit card defaults worry Reserve Bank

Rising defaults in the credit card segment is worrying the Reserve Bank of India (RBI) as interest rates are rising and customer profiles are weakening. Pointing to the new trend, RBI deputy governor V Leeladhar on Friday said rising credit card defaults in the country are a matter of concern.

"Defaults are going up. It's a matter of concern," he said on the sidelines of a banking conference when asked about the practice of some banks who issue cards without checking the creditworthiness of their customers.

Credit card outstandings have shot up by a whopping 87 per cent, or Rs 12,375 crore, to Rs 26,596 crore during the year ended May 23, 2008, the RBI said. This has happened at a time when growth rate in all other modes of personal loans, including housing, consumer durables and advances against fixed deposits, moderated during the period. In its quarterly policy review on Tuesday, the RBI stressed on the need to improve the credit quality of banks via stricter credit appraisals.

The RBI had recently asked banks not to charge excessive interest rates on personal loans and small advances, including credit cards, and prescribe a ceiling rate on such loans in a bid to curb the rampant practice among banks to jack up the rates every now and then without valid reasons. Currently, banks charge 40-49 per cent per annum interest rate if the card holders fail to make full payment on the due date or pay the minimum amount due. This rate is nearly four times that of housing loan rates - currently at 10.45-11 per cent.

Unsecured loans, which consist of personal loans and credit card receivables, form an estimated one-fifth of the total outstanding retail loans as on March 31, 2008, up from 6 per cent on March 31, 2004. The ultimate losses on these receivables are often higher than those in the secured asset classes, Crisil said in a study.

In the unsecured loans segment (mainly credit cards), the exposure to low-income customers has been steadily increasing. Loss levels in the low-income customer segment are currently estimated in the 7 to 9 per cent range. A further decline in asset quality seems likely in the segment, on account of seasoning in portfolio, over-leverage by customers, and the entry of players into under-banked geographies; loss levels may be in the 12 to 15 per cent range over the medium term, Crisil said.