Lenders Yet To Reward Good Credit Behaviour: How To Break The Logjam (Part 2)

I have earlier written Part 1 of this topic – the surprise I had over the changed (increased) interest rate on my credit card in spite of having a wonderful credit history and a high score. I have also discussed some possible reasons as to why this is happening – why I am not getting a lower rate of interest. Now I want to talk about possible ways to break the logjam.

But to discuss this, we need to understand why interest rates are so high on credit cards. The main reasons are:
1. Very high non-performing loans or NPLs resulting in higher provisioning, losses and write-offs.
2. High operating costs including technology, salaries and other infrastructure.
3. Seemingly no ‘nudge’ from the regulator on what looks like an extraordinary interest rate.

So why are NPLs so high? Although no published or authenticated figures are available, the numbers doing the rounds range from 8-15% of the portfolio. These are alarming figures and to put them into perspective, housing loan NPLs are less than 1%. Yes, we do agree that the very nature of credit cards makes them more risky and that explains the higher NPLs to some extent. But the current numbers are unacceptable by any standard, especially when they begin to be justifications for the high rates of interest. The main reasons for this are indiscriminate acquisition methods and questionable underwriting and approval policies. I do believe that card issuers have become more sensitive and rationale now, but there is a huge legacy portfolio that needs to be ‘cleaned up.’

Card issuers should make their acquisition, risk and underwriting processes more conservative. That will reduce your NPL numbers and you will be able to reduce interest rates.

High operating costs could be another key issue. While one accepts there is a high investment in technology and back office operations to run an efficient card business, the pressure to recover this investment should be spread over a longer period, rather than what is currently in practice. Salaries, bonuses, performance incentives – again all of them are acceptable but can these be ‘tempered’ and brought down to more realistic numbers?

Investment in technology is a one-time cost and should be viewed accordingly. It doesn’t have to be recovered in a shorter timeframe. Also, watch the other overheads – infrastructure and salaries. Salaries and bonuses seem to have skyrocketed with no logical justification except to say ‘the market is driving them.’ The question is – are we not the market?

The regulator in India has been incredibly proactive and done a great job of regulating a difficult and complex market, in fairly volatile conditions. However, for some reasons, the Reserve Bank of India has been silent on the interest rates being charged on credit cards by the commercial banks it regulates. It is more than 35% on an annual basis – does seem high, doesn’t it? The RBI probably has reasons for its silence and may continue to maintain the status quo.

Is there a strong case for the RBI to take a stronger view and a more proactive role in the current practice of charging the rates that card issuers do charge? Maybe cap it at no more than half of the current rates?

Additionally and in conclusion I would like to leave everyone (RBI, card issuers and you, the reader) with some thoughts:

1. The principle of risk versus reward has to come into play – why should I pay such a high rate when I have such a good score?
2. Incentivise me for being such a good and regular servicer of my card.
3. Do not make me subsidise the defaulter.

And let us not forget one thing. The government has already realised that the collections from tax are higher once the tax rates are reduced. Therefore, if the banks lower their interest rates, people could resolve their credit issues and repay what they otherwise wouldn’t – resulting in higher earnings in spite of lower rates.

Meanwhile, individuals like us should never overshoot the due date and always pay on time, so that the interest cost is ‘zero.’

About the author: Satish Mehta is the Founder and Director of Credexpert, a credit and debt counselling company in India.
Image: Thinkstock