Wednesday, November 21, 2007

Indians started living life on plastic money

In India in financial services plastic money business is growing faster. People have finally started using plastic money, though the number of users is too less as compared to western countries.

In India there are around 25 million credit cards from which ICICI Bank is the largest competitor with 8.5 million cards issued. Citibank, SBI-GE Card and HDFC Bank are the other prominent players in the sector.

The lifestyle of the people has changed so as the spending power. From traveling to dining to paying small bills to apparel purchases; they pay everything through their credit cards. Fuel accounts of a very small amount of these credit purchases, unlike what is usually believed, as most of it is done through debit cards.

According to the reports of the credit card companies the consumers are spending Rs 50,000 crore annually which is expected to grow at 50 percent over the next four to five years. Experts are of a view that with changing lifestyle this trend will catch momentum in the future.

"Travel and dining corner about one-fourth of the total credit card purchases which signifies the shift in Indian spending habits. According to industry expert analysis earlier, purchases of both consumer durables and jewellery items were larger than the hospitality segment. Going forward, this trend should continue."

HDFC Bank VP and head (credit cards and product portfolio) Parag Rao says, "Jewellery, consumer durables, fuel purchases, apparel are a much smaller segment than travel and dining which comprise the largest chunk of credit card purchases. Eating out has in fact become a big concept now."

According to the experts while travel and hotel bills along with dining, account for about 25-35 percent of the total value of purchases through credit cards, purchase of jewellery accounts for 10-11 percent of the purchases. Apparel purchases account for eight to 10 percent and consumer durables like TV and mobile phones account for nearly six to seven percent of the purchases through plastic money. Besides this, a utility payment is yet another segment where plastic money is making inroads.

Of course this is good news for the credit card companies, but there is a hitch attached to it. While there is no doubt that more and more Indians are turning towards plastic money, not many of them are able to repay their debts. Bad news! But sadly its true.

The default rate on credit cards is the highest across different loan categories in the country. The rate for credit cards has risen from seven to nine percent of total outstanding payments last year to about 10-12 percent this year. In contrast, the default rate is three to four percent for personal loans, two percent for auto and two-wheeler loans and is less than one percent for mortgage loans.

Experts are of a view that with growing daily expenses and rising EMIs on existing loans, the number of customers defaulting on credit card payments has risen significantly. But volume games will slowly remove this hitch.

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