As loans get tougher, plastic gets consumers going

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Last Saturday, the Reserve Bank of India’s deputy governor, V Leeladhar, put out a red flag to the fast-growing credit card market in India, when he pointed out that defaults by credit card holders are going up and many banks are actively looking at the issue. There is good reason for the country’s Central bank to worry—by May 2008, India’s outstanding credit card debt had touched over Rs 26,500 crore, up a sharp 87% from May 2007.

By contrast, outstanding credit card liabilities grew 45% in the previous year. In fact, credit card receivables grew faster than all other segments of consumer loans—personal, housing, consumer durables and advances against fixed deposits—in 2007-08. Personal loans, for instance, saw a sharp dip in growth—from 23.9% at the end of May 2007 to less than 16% till May 2008.

With inflation hovering at nearly 12% and the Central bank tightening its monetary policy in response, the credit squeeze is hurting individual consumers as much as India Inc, if not more. And with banks getting stingier on doling out personal loans, it seems more consumers are opting to flash their plastic credit lines to make purchases —even if that means paying a much higher interest rate than around 19%—the rate charged on personal loans.

“In the last couple of years, if interest rates on personal loans have risen by 100bps, they have been increased by 110 bps on credit cards, but the easy issuing of cards has made them attractive,” said Saugata Bhattacharya, vice-president, business and economic research, Axis Bank.

Importantly, the RBI is not seeing any signs of a slow-down in the demand for credit cards. “Demand for credit cards has not slowed down. It (the demand) might have plateaued,” Leeladhar said at an Indian Banks’ Association function.

Easy money

With banks competing aggressively in the credit card business, getting a credit card is easier than it used to be, especially with several players distributing unsolicited cards to potential consumers. More importantly, with the demographic profile of the country changing so that a greater part of the working population is young, consumption patterns are changing as well as the mode of spending.