Prime lending rates haven?t gone up following RBI?s squeeze through CRR, but sub-PLR rates are being hiked by banks, and these include rates on credit cards. Indian card users pay some of the highest rates in the world. On average, card issuers charge around 36% interest annually, topped by other charges. So as banks raise credit card rates further, the question always relevant becomes sharper: why do Indians pay close to 40% annually when Americans pay around 13%? American banks settled for this rate in the early years of this decade. No simple explanation suffices to rationalise the difference. Cost of funds, lower in America, can?t by itself explain it. Again, while it is true that strict laws against ?usury? used to operate in many American states and they capped interest rates, this legacy has been shaken off by the banking industry, which now charges interest rates the market can bear.
What about India?s credit card industry? Does it have something peculiar that explains high interest rates? There are no detailed studies in the public domain on the profitability of credit card operations in India. But available evidence suggests costs of operations are high because rates of default are high. Apparently, one in every ten cardholder in India defaults while one in 25 does in the US. This does represent a significant cost and Indian credit card issuers have to factor this in while calculating rates. Issuers also point out that that the absence of a nationwide credit reporting system that makes assessment of credit worthiness easier, more certain and less costly, can improve their business. However, all this still doesn?t fully explain the high rates. In 2005, RBI?s working group on credit card businesses had reported that globally credit cards were regulated not by central banks per se, but by consumer/fair trade regulators and laws. These institutions, unfortunately, are weak in India. The central bank did send out a guideline on credit card operations that resulted in higher levels of disclosure of transaction details to consumers. It also asked for rates to be rationalised. But RBI cannot and should not?and, in this case, does not seem to want to?fix credit card interest rates. Only more competition, better information system and lower defaults can bring rates down. That sounds like a long-term solution. Sadly, it is.
