Economic Times, September 12, 2008

There is a clear-cut need to do so

Without doubt, there should certainly be a cap on credit card interest rates. The usual interest rate is high enough but where card holders ‘revolve’ credit or pay the ‘minimum amount’ the interest is about four times more than that on housing loans. Why? Credit cards have become a vehicle for credit expansion at extremely attractive rates for the card issuers.

The card users are first lured to spend money, which they cannot repay due to exorbitant rate of interest that leads them into a debt trap. Later they are encouraged to convert the outstanding into a loan. The banks do so to avoid an increase to their non-performing assets, which dents their balance sheets.

Lately, industry-level delinquency has been on the rise primarily because of the high interest rates. It has been reported that India’s outstanding credit card debt had touched Rs 26,500 crore in May 2008, up by 87% from May 2007. It has also been estimated that the default rates may increase to 9.5% over the next two years from 7.5% currently.

The RBI, however, continues to hold the view that credit cards are basically a ‘payment mechanism’ and refuses to change its stand. CUTS has been trying to convince RBI otherwise for over five years now by citing examples from around the world. This interpretation is simplistic for the very purpose of a credit card is to provide credit. The Credit Information Companies (Regulation) Bill, 2005 clearly categorises credit card users as ‘borrowers’ as do many consumer credit regulations across the world.

Smaller developing countries such as Thailand prescribed a universal cap of 18% as being chargeable on credit cards many years back. The minimum monthly salary requirements for credit card holders were also raised there. In South Korea too the interest rates and quantum of advances are regulated in addition to regulations on operations and pricing. National Consumer Disputes Redressal Commission restraining banks from charging interest rates in excess of 30% is also high. Banks should charge interest as applicable to an unsecured advance.