Vault Matters: The partial stand on usurious pricing

India is no exception to the global phenomenon of growing stress in credit cards businesses.

Last week, this column explored the merits of the Reserve Bank of India's recent cease and desist order on four relatively small non-banks. If the bottom of the pyramid or downtrodden segment was being unduly exploited through high interest rates, it is justified that the regulator stepped in to correct the situation for microfinance loans.

However, what about credit cards? If the average interest rate on MFI loans ranged from 20-28%, with some players charging as high as 35% or 42%, credit cards are a product where every player starts at around 36% interest rate. Annual interest rates on credit cards can reach up to 45% or 48% in some cases.

Rising Credit Card Defaults

A recent research note by Macquarie's Suresh Ganapathy pointed out that a segment of the middle class is increasingly defaulting on credit cards. Bankers say this category of credit card users finds it viable or even economical to default rather than repay card outstanding. Increasing delinquencies ultimately boil down to the interest rate charged by banks, which unfortunately is not being termed as usurious by the Indian central bank. The reason is that credit cards are seen as a nuanced product voluntarily availed by the customer with full knowledge that revolver rates on outstanding balances are steep.

How is this argument different from MFI loans, except that MFI loans are extended to low-income or bottom of pyramid borrowers whereas a credit card user by default is reckoned as a middle class customer who can afford it. Perhaps the element of convenience tagged to a card also adds to this quotient.

But it needs to be remembered that the middle class is the segment which is patronizing and popularizing the use of UPI. A unique credit card based product was juxtaposed on UPI about two years ago, solely backing that the middle class will take it ahead, namely, UPI through credit cards. If the product should take wings, its time credit cards were made more affordable.

India Not Alone in Delinquency Woes

For one, India is no exception to the global phenomenon of growing stress in credit cards businesses. Whether Singapore, Hong Kong, Australia or US, credit cards are becoming a high delinquency business. Singapore’s parliament is in deliberation with Monetary Authority of Singapore to find ways to reduce delinquencies in credit cards, including increased regulations on this product such as a cap on interest rates. Vietnam, France and Poland are a few countries where an interest rate cap on credit cards already exist. When the bottom of pyramid borrowers are in stress, historically governments, whether local, state or centre, has rescued them. But the middle class, which will play a critical role in building the $5 trillion economy, is often left high and dry. Being a free market product, credit cards generate the highest ROA among retail loan products. Which is why despite increasing delinquencies banks are yet to significantly curtail new card issuances unlike unsecured personal loans.

If the middle class borrowers increasingly default and shy away from consuming loans, a critical part of building a consumption led economy might be at risk. This is why a few global central banks have solved this problem by intervening on interest rates for credit cards. For RBI, ceiling interest rates is not a chosen path. But how about taking a baby step in that direction, by recognizing that banks do charge usurious interest rates on credit cards. If not a stringent action like we saw last month, a few mentions of this by RBI heads in public forum could do the trick.