As loans get tougher, plastic gets consumers going

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New Delhi, Aug 4: director Vikas Vasal.

Moreover, even as banks have gone slow on personal consumption loans, retailers who had tied up financiers to give on-the-spot loans in segments like consumer durables, are not as active as they used to be. In many cases, there are no financing facilities for prospective customers in the store premises.

To get traditional financing, consumers have to approach a bank and go through cumbersome paperwork for a personal or consumer durable loan. The alternative —of simply pulling your credit card out of your wallet—seems much more palatable, especially with several card issuers offering an ‘equated monthly instalment’ option for big-ticket purchases.

“Many a times, one needs to buy goods urgently to meet certain requirements. Obtaining a personal loan takes time and requires lot of documentation. In comparison, it is much easier to buy using credit cards,” Vasal points out.

It’s not just credit cards that are seeing high usage. With electronic payments evolving into a robust system in the country, savvier consumers are saying goodbye to the ‘cash and carry’ economy as well as their cheque-books. Retail electronic payments, which grew at more than 80% in 2007, continue to soar. In May 2008, electronic payments were at Rs 41,675.59 crore, 11.14% higher than April 2008 (Rs 37,497.15 crore) and up 76.64% from May 2007.

Dark Clouds

The Central bank had recently suggested capping the rate on personal loans and credit cards, which it considers excessively high. Banks charge 40-49% per annum interest in cases where card holders cannot make the full payment on the due date or pay the minimum amount due. This rate is about four times that on housing loans, currently at 10.45-11%.

“Rates are not likely to come down this fiscal as the RBI would keep a tight monetary stance. People may defer purchases for sometime. Even if they are to make the purchase by availing loans, they should invariably go for personal loans and not credit cards,” Bhattacharya advises.

It is in this context that the RBI deputy governor’s comments on rising card defaults become significant. The Central bank has emphasised the need to improve the credit quality through a stricter loan appraisal process, in its first quarter monetary policy review on July 29.