Monday, April 21, 2008

Increase of defaulters slows down credit card business growth

Recently there has been increase in the number of defaulters due to which banks have been forced to tighten due-diligence procedures therefore the credit card business is facing slowdown.

According to the RBI data the growth in new credit card accounts has gone low by 18 per cent in the just concluded fiscal (until February), as compared to 33 per cent in 2006-07. At present the total card base in the country is around at 26 million.

Mr Tarun Bhatia, Head-Financial Sector ratings, CRISIL said, “While earlier, banks would extend loans to customers with a minimum annual income of Rs 80,000, they have now increased this to a minimum of Rs 1.2 lakh. Banks are also asking for the PAN card and strictly following other ‘Know Your Customer’ procedures before giving credit cards”.

ICICI Bank has been the largest credit card provider in the country issued around 9 million credit cards. Past three years the growth of the credit card accounts of the ICICI banks has come down to around 20-22 per cent lower than the average growth of 40 per cent.

“The overall slowdown in retail loans has also rubbed off on the credit card segment,” said Mr Sachin Khandelwal, Head-Cards Product Group, ICICI Bank.

According to Mr Parag Rao, Senior Vice-President, Head-Product and Portfolio Management, Credit Cards, HDFC Bank the interest rates on various segments in the retail asset portfolio have steadily gone up and, so, the outflow in terms of an EMI (equated monthly installments) has also gone up. He said, “This has put pressure on individual customers which in turn has increased the default rates in the industry,”

Bankers allege in view of high rates of delinquency they are becoming more cautious about lending in these segments.

According to industry analysis the default rates on credit cards have gone up by almost 150-200 basis points this year as compared to 11-12 per cent in 2007-08, against 9-10 per cent in 2006-07.

“The new issuance of cards has seen a slowdown because of credit losses,” said Mr Neeraj Swaroop, Regional Chief Executive, India and South Asia, Standard Chartered Bank.

Standard Chartered Bank has not been hostile about increasing the number of cards issued but instead is focusing on increasing spends on each existing card.

“Customers are highly over-leveraged and are given loans 20-30 times of their annual income. Banks are not making good use of credit bureau data,” said a senior official at a foreign bank.

Credit data bureau analysis’s points out that banks which are stressing more on their vigorous expansion program are trying to reach out to customers by either offering them a credit card or a personal loan.

“Defaults have started spiraling because banks have gone into Tier II and Tier III towns as well as the lower-income segments. The average cards per user have also increased,” said Mr Bhatia.

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