ICICI Bank hike credit card interest rates

The ICICI bank cardholders have to pay more interest on “extended credit and cash advances”. Bank has increased “extended credit and cash advances” from the current 3.15 per cent per month (45.09 pc per annum) to 3.40 per cent per month (49.36 per cent annualized) effective from June 1, 2008.

Bank is informing its customers through credit card statements sent to them. At the bottom of the statement there is an inconspicuous line conveying about the increase in interest rate.

Credit card industry has always been known for hike in rates and it signals to troubled times. Most of the card companies are charging around 2.7 per cent to 2.9 per cent per month or about 36 per cent per annum and this also has been criticized as being exorbitant rates.

From long time there has been demand for lower interest rates on credit card spending. But card companies have always defended against hike in interest rates with a reasoning of high default rates, poor laws and lack of any security and the bad borrower behavior.

Across the card industry earlier default rates were in the 5-7 per cent range have now double says Shameek Bhargava, Managing Director, Head of Cards, Asia Pacific, Deutsche Bank, India.

According to State Bank of India in the recent times its losses on the credit card business were of the order of Rs 150 crore and non performing assets (NPAs) on this portfolio had touched a whopping 16.5 per cent. The problem became so severe that SBI had to replace the head of the card company with one of its own officers.

It has become difficult to understand why the credit card industry is facing loss when the economy is growing at 9 per cent and there has been a 15 per cent growth in wages and salaries for the last three years at least – not to mention the considerable amount of spending on consumer goods, entertainment, groceries and travel.

According to Mr Bhargava the reason is increase in number of highly over-leveraged customers using multiple cards and creating havoc all around. He suggests that to tackle this problem card companies should use more of own sales agents rather than outsource the marketing function to other agencies.

The borrowers splitting off the system through multiple banks, accounts and cards led to the need for the formation of the Credit Information Bureau of India (CIBIL), an agency meant for sharing borrower information among lenders, was started a couple of years ago. On seeing the numbers it would be clear that the lenders are not making the best use of resources available.

A credit card official name to be kept anonymous said, “About 80 per cent of due diligence is being done on their own by all major banks. A verification of data from CIBIL is being taken up on an optional basis. CIBIL may become popular only three to five years from now going by the present use.”

In fact at present there is very little hope of any immediate improvement. Earlier this year Credit Rating agency Crisil had forecast that the NPA situation in personal loans would worsen this fiscal. Credit card holders, brace up.