Credit card companies may raise fees to skirt rate cap

Many leading credit card issuing banks have started upgrading their credit card customers’ higher range of credit cards i.e. to platinum or titanium cards.

In addition the banks are also making working on a back-up plan in case the Supreme Court turns down their petition against a consumer court decision to restrict the annual interest rate at 30 per cent.

The apex court will be giving its judgment on this matter in a few days time. Leading bankers told they might not be left with no other option but to impose a steep annual fee lest the Court agrees with the consumer court’s opinion.

Earlier in order to grab market share, most banks had waived the annual fee on credit cards. Leading banker pointed out, “We will have no option but to impose a hefty fee if there is a cap on the interest rate. In the process, the business itself would become unviable, forcing many of us to withdraw”.

Although many banks have already started “upgrading” their customers to platinum or titanium cards with a few free offers in return for an annual fee. But the numbers seems to be still too small and banks are taking the move of upgrading the customers very cautiously due to fear of losing customers.

Bankers state that credit-card business is not profitable in India because of high administration costs and the small ticket size of transactions.

“The average ticket size is just Rs 1,500 and the administration costs are too high. Besides, the default rate in this segment is also pretty high. Thus, it doesn’t make sense to cap interest rates at 30 per cent,” a foreign banker said.

Another banker stated that high rates also lead to lower mis-selling and raise the entry barrier. But others are of view that banks themselves are responsible for this mess. At present the default rate on credit cards is 8-15 per cent and this is going up mainly due to the practice of issuing free cards.

“Too many credit cards prompted many borrowers to spend beyond their means leading to delinquencies,” admitted a banker.

A few weeks ago, a group of foreign lenders including Citibank, HSBC, Standard Chartered Bank and American Express Bank had filed a case in the apex court challenging a consumer court’s judgment that a bank cannot charge beyond 30 per cent annually on credit cards, even in cases of defaults.

The banks argued that capping of interest rates on credit card payment is opposite to the Reserve Bank of India policy which gives banks the freedom to fix rates on non-priority sector personal loans, in spite of of the loan size.

The apex court has given the banks three weeks’ time for put forward their explanation and feedback on the high credit card rates, which range from 35 to 50 per cent.

Currently, Citibank is having over 3.7 million credit-card holders in India. HSBC, which manages about 2.8 million credit-card accounts here, charges annual fees in the range of Rs 750 to Rs 4,000 depending on the category of the card. ICICI Bank charge annual fees in the range of Rs 1,500 to Rs 25,000 according to the features of the card. About 50 per cent of the bank’s card-holders hold free cards.