Tuesday, August 19, 2008

Banks allow conversion of credit card dues to loan

More and more banks are encouraging borrowers to convert credit card dues into personal loans with an aim to keep away defaults which can be prompted by inflation and rising rates. All leading banks are giving an option to the investors of making payments for purchases in installments. Some banks are being practical and, others are giving the option as part of a restructuring package after classifying the customer as offender.

As per the Reserve Bank of India (RBI), data credit card transactions amounted to over Rs 60,000 crore between May 2007 and May 2008. According to RBI data around 20% of card transactions were rolled over, resulting in Rs 12,000 crore of credit card receivables, which have been classified as loans by banks. In the earlier years, the amount classified as loans was less than 10% of credit card transactions. Banks are fearing the rising interest rates and prices are eating into the disposable income of borrowers, which can increase the chances of default.

Credit card dues after the initial interest-free period draw interest rates of over 18-38%. Thus personal loans can be availed against this at rates starting from 14%. Banks have started becoming more practical therefore, for some time banks have been offering the facility of paying for purchases in installments to their cardholders. In some cases, banks have started giving suggestions to the customers who make large transactions. Otherwise banks give this offer when a customer fails to make a large payment. For instance at present, SBI Cards is offering the EMI scheme on transactions of more than Rs 2,500.

Banks have started keeping a watch on the customers who have not been regular with their payments. “We have an idea about customers’ spending patterns through the transaction monitoring alert system. If a customer spends an average of Rs 8,000 on his credit card every month and suddenly we witness a transaction of Rs 50,000 billed in his name, we call the customer. We inform the customer that he/she has an option to convert it into EMIs, which could weigh lesser on his pocket,” said ICICI Bank head, cards group, Sachin Khandelwal.

Mr Khandelwal added in case customer plans to buy an appliance for Rs 20,000 but ends up spending Rs 40,000 on a higher-end product, then bank offers these options to customers at the store itself. Get all the best credit cards offered in India by all major banks with their attractive rewards points.

With cards the traditional way has been replaced where consumer durables used to be financed through dealerships, which is costly.

Citibank is offering the conversion of the out standings on cards into personal loans. Still these customers will be reported to the credit bureau. “Customers who become delinquent are also offered special installment programs called ‘settlements,’ which ensure structured payments in a timely manner and reduce their overall credit burden. Once again, Citibank works directly with the customer to understand their overall debt and evaluates their cash flows to ensure that this personalized payment plan is affordable on a monthly basis throughout the tenor,” said Citibank business manager-cards Sandeep Bhalla.

Mr Bhalla added that the bank is cross-selling installment loans to customers in order to help them in meeting their purchasing and payment needs through marketing efforts. “These are designed and delivered after having a conversation with the customer on his or her overall needs and ability to pay, based on monthly cash flows. This interaction determines the amount and tenor of the loan, such that a customer can manage the monthly payments to Citibank along with their other payment obligations. These promotions are offered through certain preferred vendors at points-of-purchase or upon request by customers post their purchase,” said he.

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