credit card
Rising defaults on credit card obligations have made the banking sector cautious during the festive season. According to recent data from the Reserve Bank of India (RBI), there has been a sharp decline in the pace of addition of new credit cards in September, which fell from 9.2 lakh new cards in August to 6.2 lakh in September. This represents a massive 64% drop compared to last year, bringing the total number of credit cards to 106 million.
Analysts believe that due to increasing risks in the unsecured credit card sector, banks have become more cautious in attracting new customers. IDBI Capital analyst Bunty Chawla said HDFC Bank and SBI Cards have led the way in issuing new cards, but the pace of credit card distribution is likely to remain slow in the near future.
What does the report say?
The RBI has recently changed the risk standards, under which a higher risk weight has been applied to unsecured personal loans and bank loans to non-banking financial companies (NBFCs). It aims to control the growing risks in the credit card and other unsecured lending segments. HDFC Bank issued 4.3 lakh new cards in September, while SBI Card added 1.4 lakh and Axis Bank added 53,000 cards.
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Whose cards are becoming the default?
According to a report by Macquarie Capital, default rates on banks’ credit card portfolio are currently close to 6%, which is a cause for concern for the banking sector. In the report, Suresh Ganapathy, head of financial services research, said the credit card default rate is higher in the middle-income group. Ganapathy says that after the RBI deregulated the scope of personal loans, the middle class was left with limited options to pay their dues, leading to a recession in urban areas.
Consumer spending increased during festivals
The RBI data also shows that there has been a decline in the growth rate of transactions, which fell from 1.6% in August to 0.5% in September. However, the festive season witnessed a surge in consumer spending, resulting in total credit card spending rising from Rs 1.69 lakh crore in August to Rs 1.77 lakh crore in September. This is an increase of 23.8% year-on-year.
Why is delinquency increasing?
Experts say that young Millennials often use their entire credit limit, resulting in an increase in defaults and many accounts becoming non-performing assets (NPA). The RBI has recently directed banks and NBFCs to exercise caution in providing unsecured consumer loans.
