Moneymanagement’s Weblog

Why are interest rates on credit cards so high in India?

Posted in banking by moneymanagement on September 10, 2008

 

 

This is Guest post by Vinod Chand.

 

Of late there has been an increase in the interest rate that the bank is offering you on your fixed deposits. When banks pay you more money it translates to a higher cost of borrowing for them.

While banks are offering up to 9.5% on a one-year fixed deposit, they are charging up to 13.5% to people who are borrowing from them. This translates to a spread of about 4%.

But banks deal in many products. Amongst them are home loans, personal loans, vehicle loans, credit cards, etc. Similarly on the deposit side bank are having savings accounts on which they are paying just 3.5% interest per annum.

On the lending side, banks have quietly raised the interest rates on credit cards to as high as 49% per annum. Recently National Consumer Redressal Forum passed an order restricting the interest rate on credit cards to 30%. Most of the foreign banks including Standard Chartered, American Express, CitiBank, etc. have gone in appeal against this order to the Supreme Court of India and sought a stay on the order of the National Consumer Redressal Forum. For the time being Supreme Court has rejected the demand for the stay.

Interestingly in the affidavit filed by the banks justifying the high rates are reasons such as high cost of acquiring a customer, setting up his account, providing phone banking services, making telemarketing calls are cited as reasons.

It would make an interesting study to compare the operations of credit cards across the globe. Cursory research on the internet points to the following

Benchmark Rates in India

Percentage

Benchmark Rates in US

Percentage

Bank Rate

6%

Bank Rate

2%

Prime Lending Rate

12.75% to 13.25%

Prime Lending Rate

5%

Savings Bank Rate

3.5%

Savings Bank Rate

0.4%

Fixed Deposit Rate

9.5% for One Year

Certificate of Deposit

1.98%

Citibank Platinum

49% APR

Citibank Platinum

8.49%

Citibank Platinum Cash Advance

19.99% APR

Citibank Platinum Cash Advance Fees

24% APR

Home Loan

11.5%

Mortgage Loan

4.75% to 7.75%

From above information it becomes clear that there is a huge gap between the rates charged on credit cards in India and the US. While the gap in bank rate is just 4% (translating to 300% increase) the gap in Credit card rates is 41% translating to an increase of more than 600%.

Amazingly the delinquency rate in India is much lower that that in the US. In India, insolvency laws are myriad and declaring oneself insolvent rare.

Even after being armed with a Credit Information Bureau in the form of CIBIL, credit card issuing banks are painting all their borrowers with the same brush. Each one of the card holder is being charged the same rate of interest taking shelter under the reason that there are defaulters who are making doing credit card business expensive.

The questions to ask here are, when bank are aware that this is a very high risk business, justified by then by charging very high interest rates, why are they indulging in it?

Why not stick to regular business of banking where you borrow from your own account holders and lend rather than borrow from anyone, including RBI, fellow bankers and lend to high risk products?

When rates dip, business increases. Take the example of mobile phone call rates. Once upon a time it used to cost 16 rupees to talk for a minute on the mobile phone. Even incoming calls were to be paid by the called person. When rates started dipping, mobile penetration increased by leaps and bounds.

I think banks need to look inward to curtail their lending rates. If the rates were low, more people would use credit cards. Even rolling over credit card dues would then not lead to a debt trap which it currently does in most cases. Banks need to reduce their cost of operation rather than try to transfer the high cost to the hapless card holder. They need to shun the five-star culture of their operations.

As the Supreme Court is seized with the matter, I am sure good sense will prevail and an errant government, Reserve Bank of India, which has let this situation happen by not giving proper guidelines, along with the banks will be reined in as far as interest rates on credit cards are concerned.

Interesting Links

http://www.smartmoney.com/nowwhat/index.cfm?story=credittricks

http://www.smartmoney.com/debt/advice/index.cfm?story=digoutofdebt

http://cardweb.com/

http://www.online.citibank.co.in/portal/newgen/service/service_charges.htm#4c

Interesting calculator that allows you to find out how much interest you will pay if you stop spending on your card and make a fixed payment every month. I tried with 20,000 and a fixed payment of 1000 (5%) and it came back with an amazing detail of 23,037 as interest and a payment period of 43 months (3 Years and 7 months). This does not include the annual charges that you would per force have to pay since you have an outstanding on your card!

http://www.smartmoney.com/debt/calculator/index.cfm?story=loancost

A professional from the Information Technology field and an entrepreneur at heart. With more than 20 years of experience, he has been involved in IT Training, Software Development, Web Portal Development. As part of his attempt to give back to the society, he does credit counselling for people distressed by credit card and other debts. He is the General Secretary of Credit Consumers Association of India, a non-profit body. He can be contacted at vinodchand@gmail.com. He also blogs passionately at www.creditconsumersassociation.blogspot.com

 

 

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15 Responses

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  1. SpungeBob said, on September 16, 2008 at 8:47 pm

    The gap between the lending and borrowing interest rates remains the same in almost all countries. The Banks make profit from the difference in what they pay to their depositors to what they get from their borrowers.

    But still the credit card companies make the difference so high it can eat up everything and they do borrow from other Banks and Central Banks at the same rate as other rates.

    Even though they pay back some of their profit to their investors. Recently the EPS [Earnings Per Share] for Visa is negative, even though they expected it to go as high as 2.75 in the next financial year.

  2. Dwarakanath said, on November 20, 2008 at 9:41 pm

    Hi Team,

    I really do not understand how good you people are. Though i made the payment on time through e-payment.
    You people charged me Rs.250 as Auto debit charges..

    Do you people really work.. Getting thousands of salary everymonth, attending calls, sending mails and statements.. Is this only part of your work..

    Dont you people look at the calculations.. Did i ever tell you people that i will make the payment through my account. I have made the payment on time. It was 5th Nov which was last date to make the payment.

    My friend adviced me not to take credit card.. Unfortunately i have got it..

    Let me share how i got this card. I was working with Infosys BPO where i was getting my salary was Rs.10500 as my take home.one fine day ( which was very bad day to me ), I was having my tea where this illeterate (an ICICI executive ) approached me to take credit card. I told him not interested. He begged me that i have not reached my target and he told his family problems. He convienced me and he promised me that he would get my credit limit upto Rs.100000( One Lakh rupees ) . Which is really impossible and ten times my salary.

    I told him “”” Boss, Dont play pranks with me..” he said” Sir i will assure you.. you will get credit limit upto Rs.100000″. I was reluctant to take it.. My friend also told about his problems ( he already took that credit card )..

    His name is Karthik.Sreenivas ( he was one sad victim .. He paid so much towards ICICI credit card.. it was about his fate..) .

    Why i am drafting such big mail.. ICICI has such good reputation .. Employees please be responsible..Now i am working with reputed organisation, I am getting paid much better than Infosys. I do have few credit cards ( all are Big international banks like,American express, ABN Amro and HSBC ).

    The service is really awaesome. Even i paid after payment date ( two days later ) .. They have not charged interest.. Though it is justified.

    I kindly request you to re-consider the bill and get back to me.. Otherwise i have enough time to draft much bigger mail than this..I know few social forums which will always reachable by Commissioner of police and high society people watching it regulary.. I do not hesitate to take this to Consumer forum..

    You must be thinking ” Why this guy is thinking in such manner for Rs.250.. Its my money.. i have earned it .. i have right to enjoy .. not to pay penalities.. for false reasons..

    SHAME LESS PEOPLE .. DO YOUR WORK PROPERLY.. I will call you up tomorrow as my mobile has been switched off >……

    On Thu, Nov 20, 2008 at 7:59 PM, wrote:

    Dear Mr. NK DWARAKANATH,

    Please find enclosed your account statement. To open the statement, you require an 8-character password.

    The first four letters of your password are the first 4 letters of your name as displayed on your credit card followed by your date and month of birth (in DDMM format). The password is case sensitive (lowercase). Please make sure that you do not include any special characters or spaces.

    For example, if the name on your credit card is Sujit Sawant and your date of birth is 05-01-1950, then your password will be suji0501. If the name on your Credit Card is Dr. Raj Sinha and your date of birth is 05-01-1950, then your password will be drra0501.

    To open this secure encrypted file, all you need is Adobe Acrobat Reader version 6.0 or above. If you do not have Adobe Acrobat Reader, please click on this link http://www.adobe.com/products/acrobat/readstep2.html to download the free version.

    Please note that you will not be able to open this file or view the file properly with any version lower than Adobe Acrobat Reader 6.0.

    ——————————————————————————–

    This is a system generated mail. Please do not reply back to this email ID.

    With effect from June 1, 2008 certain important changes have been made in respect of credit cards:
    1. Maximum credit-free period is reduced to 48 days from 52 days.
    2. Late payment charges are revised to 30% of minimum amount outstanding (Minimum Rs. 400/- and maximum Rs. 600/-)
    3. Cash payments at bank branches for credit card dues will attract a fee of Rs. 100/- per transaction.
    4. Replacement of credit card will attract a fee of Rs. 100/-.

    If you have a query or need any clarification you may:
    (1) Log in to your account online and write to us through Accounts Manager
    (2) Visit the ‘Email Us’ link at http://www.icicibank.com to send us an e-mail or
    (3) Call our 24-hour Customer Care

    ——————————————————————————–

    HOW TO MAKE YOUR PAYMENT
    Making payments for your ICICI Bank Credit Cards is really simple. All you have to do is to choose one of the following easy methods:
    For online payment if you have an ICICI Bank Savings Account – Go to ICICIBank.com and transfer funds from your savings account to credit card account using our Bill Pay facility.
    For online payment if you do not have an ICICI Bank Savings Account – Pay your ICICI Bank card dues from any of your non-ICICI-Bank savings accounts also through net banking if your bank has enabled the NEFT facility. Use Transaction Code 52 and IFS code ICIC0000103 for ICICI Bank as the destination bank.
    By Cheque/Draft – Make out a cheque/draft on a local bank and drop it into one of the collection boxes conveniently placed at our ICICI Bank branches / ATMs / Skypak drop boxes in your neighbourhood. The cheque/draft should be payable to ” ICICI Bank Credit Card XXXX XXXX XXXX XXXX “.

    Discover a new way of paying your Credit Card bills from your bank account anytime anywhere by using ICICI Bank iMobile. GPRS users, SMS iMobile to 56767661. For details, please click here.

    * Note: All figures are in Rs.

    ——————————————————————————–

    a) To view, Terms and Conditions, please Click here
    b) To view, Most Important Terms and Conditions, please Click here

    ‘Most Important Terms and Conditions’ and detailed ‘Terms and Conditions’ are available at http://www.icicibank.com in eleven Indian languages

    ——————————————————————————–

    CONFIDENTIALITY INFORMATION AND DISCLAIMER
    This email message and its attachments may contain confidential, proprietary or legally privileged information and is intended solely for the use of the individual or entity to whom it is addressed. If you have erroneously received this message, please delete it immediately and notify the sender. If you are not the intended recipient of the email message you should not disseminate, distribute or copy this e-mail. E-mail transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, incomplete or contain viruses and the ICICI Bank accepts no liability for any damage caused by the limitations of the e-mail transmission.

    ——————————————————————————–


    Dwarakanath.K

  3. krsnakhandelwal said, on June 16, 2009 at 5:51 pm

    You have very rightly pointed out the ugly fact of bank fleecing public. In fact the credit cards should not be allowed to charge interest at more than 1.8% and if they have other costs which are more they should raise fee on credit card issuance. The loss due to default may be covered by a suitable fee on the limit grated to the card holder before hand as this way he will know the fact of costs on account of default before hand.

  4. Emmaline Sojo said, on January 23, 2010 at 2:17 pm

    Roll on the sequence Another great post.

  5. First Time Buyer Home Loans said, on February 4, 2010 at 5:51 pm

    I am always searching online for articles that can help me. Thank you

  6. danish said, on August 31, 2010 at 12:14 pm

    Improve Your Credit Score

    One thing to improve your credit score is to maintain your credit report. Make sure all the minimum payments of your credit getting paid on time for at least last 12 months. If you are planning to buy new home in the future, please don’t take new loans for it as because it will harm you credit score rating. You can continue your fist loans by adding up your amount of credit and set the monthly payment at affordable cost. This will boost your credit score in the future as long as you can maintain your monthly payment on time.

  7. Satin Panties said, on November 17, 2010 at 11:17 pm

    i might be needing personal loans next month coz i need a home renovation and some garden renovation too ‘**

  8. Leo said, on January 9, 2011 at 8:16 am

    This is an interesting read. My credit card charge me over 20% in interest!

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