Explained: What do RBI’s new directions on issuing credit cards mean? Five key questions answered

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The Reserve Bank of India (RBI) on April 21 came out with a fresh set of guidelines for credit and debit card issuance for 2022. These guidelines will come into effect from July 1 and are applicable to all banks excluding payments banks, state cooperative banks and district central cooperative banks. These norms are aimed at protecting the interests of retail consumers.

First, what are the new RBI norms?

According to the RBI, all scheduled commercial banks other than regional rural banks (RRBs) with a net worth of Rs 100 crore and above are can now issue credit cards either independently or in partnership with other card-issuing banks or non-banking financial companies (NBFCs) with the approval of their respective boards. NBFCs with a minimum net owned fund of Rs 100 crore can also issue a credit card, provided they have a certificate of registration, apart from specific permission from the RBI to enter this business.

Apart from that, the RBI has asked card issuers to be transparent about the rate of interest and quantum of charges, among others. It has said that charges and interest rates on credit cards shall not be exorbitant and shall be connected with the cost incurred and reasonable expected returns.

Why are these norms issued?

The RBI is trying to tighten regulations in the credit card space to avoid any mis-selling and ensure that consumer interests are protected. Second, with a number of new players entering the market, it becomes necessary on the part of the regulator to issue certain guidelines so that consumers are well-informed and not taken advantage of. Tighter regulations also prevent spillover risks and frauds, especially at a time when players are aggressively pushing cards to consumers.

What happens when NBFCs are allowed to enter the credit card space?

With more players allowed to enter the market, it would mean that lenders would have to operate in a highly competitive environment. Players, including NBFCs, will have to develop new products and innovations that meet customers’ changing needs and expectations and offer low interest rates. At the same time, NBFCs would also be tightly regulated in terms of their advances.

Will these rules affect equated monthly instalments (EMIs)?

No. EMI calculations will not change because of these norms. However, these will bring in more transparency and enable consumers to know how the interest is being charged. Importantly, an EMI conversion with an interest component shall not be camouflaged as zero-interest or no-cost EMI. This clearly protects consumers from any kind of misinformation.

Will these norms help consumers?

Yes. According to analysts, these norms are a step in the right direction to protect consumer interests. However, these guidelines have not touched upon the contentious issue of capping merchant discount rates, they said. Merchant discount rate is a fee a merchant is charged by the issuing bank for accepting payments from their customers through credit and debit cards. More clarity on these issues will be needed, said analysts.