Defaults may spoil the party for credit card issuers

Ujjal K Basu Roy

The credit card business is booming despite an economic slowdown, and all issuers want a share of the pie. But there is another side to it: defaults. The business is poised for a leap, and defaults could be a dampener.

A little over 0.5 per cent of India’s annual personal consumption expenditure (PCE) of $320 billion is spent using credit and debit cards. In Hong Kong, South Korea and Taiwan, the same figures are 19 per cent ($18.2 billion), 36 per cent ($77 billion) and 12 per cent ($23.4 billion) respectively. India’s credit card volumes are $1.8 billion (Rs 8,500 crore). The credit card base in India has increased to four million, but average spends are only at $450.

Default rates are higher in the credit card given its unsecured nature. It stands at about four to six per cent in India, but can go as high as eight per cent in individual cases. While no bank is willing to divulge default figures, it has been gathered that the “negative-file list” has bulged manifold.

Says HSBC’s senior manager, personal banking and cards, India Area Management Office, Vivek Kudva: “With the slowdown in the economy and the aggressive plans of existing credit card majors like Citibank, Standard Chartered Bank, HSBC, ICICI Bank and State Bank of India (SBI) and new entrants like ABN AMRO Bank and HDFC Bank, managing portfolio delinquency and bad debt is going to be a major challenge for credit card issuers. The development of a credit bureau and use of application and behaviour scoring through advanced technology is a key to managing these portfolios tightly and ensuring that bad debts do not erode profitability.”

Adds Mr Kudva: “Another area to guard against is fraud, both from card holders and at merchant establishments. The availability of sophisticated fraud monitoring systems will be necessary to ensure that frauds are kept at reasonable levels. Only credit card companies that manage these processes successfully will be able to create enduring value and long-term profitability.”

The safeguards for a strong credit card business are robust front-end verification and strong portfolio tracking measures. A comparison between India and advanced Western markets may not be a very strong indicator of performance. But, on an absolute scale, defaults in India are a few percentage points higher than some of the Western markets.

Says Standard Chartered Bank’s head for credit cards and personal loans, India, Srinivasan Shyam: “While there are many technology platforms available, large banks have chosen a few standard international packages that are robust and can support scale. The key system needed is a robust underwriting mechanism to assess the risk potential of the various segments and service the needs of customers from a point of view of statements, query resolutions and payment management.”

Adds Mr Shyam: “Banks are collaborating at an industry level to share information of negative files and thereby protecting one another’s interest and equally working with the legal system to continuously realign to support the interests of lending organisations.” The Indian Cooperation Committee (ICC), the de facto industry forum for the local card industry, was started in 1989 and is piloted by 25 MasterCard International’s member-banks. The ICC Negative File Project was the first initiative of its kind launched in January 1999.
The member banks of ICC will provide a database of delinquent cardholders, which will be managed by Satyam Credit Information Services. The database currently consists of over 2.5 lakh records, which are available for queries from member banks. The ICC is now considering extending the database to other retail banks, non-banking finance companies (NBFCs) and mobile phone services providers based on inquiries received from them.

Says MasterCard International’s vice-president and country manager (south-Asia), Sameer Vakil: “We plan to further enhance the scope of this project, thus, taking this ICC initiative to greater heights in furthering the interests of the payment services industry. ICC member banks have been contributing data on an ongoing basis from early April 1999 onwards, as part of the Negative File Project under the aegis of the ICC.”

Some of the important developments in the card market that have been achieved under the ICC aegis are common merchant establishment warning bulletin with the list of defaulting card numbers, joint publicity programmes under the ICC banner and interaction with government bodies & regulators as a common entity.
The key to reduce defaults lies in ensuring appropriate customer education, lending to the level that repayment is demonstrated and increasing ease and convenience for repayments. The default figures vary from bank to bank as the loss recognition norms for each bank may be different. With the entry of new players every year, the card market in India is expanding and evolving as issuers experience losses based on their risk appetite. As the market stabilises and players consolidate, the overall market profitability and credit experience will get even better.