Shrinking Incomes, Rising Prices Lead To Surge In NPAs Against Credit Card Loans    

Such instances are not uncommon today. Rising prices, shrinking incomes, growing uncertainties in the job market alongside easy access to credit cards offering unsecured loans have led to a surge in personal indebtedness in the aftermath of the Covid-19 pandemic.

Data from the Reserve Bank of India’s show that the total outstanding amount on credit card loans as of March 31, 2024 stood at Rs 2,57,016 crore, up 66 per cent from Rs 1,54,540 crore a year ago. The exponential rise in credit card usage has caused worries for the central bank.

NPA On Credit Cards

The increase in credit card usage has pushed up non performing assets (NPA). RBI data suggest that for state-run banks alone, the gross NPA level on account of credit card loans surged to an alarming 18 per cent in March 2023. Though the figure was significantly lower at 1.9 per cent for the private sector banks, the overall trend has caught the central bank’s attention.

For public sector banks, the share of credit card loans delinquency in the total personal loan bouquet is the highest. Banking sources said the NPA accrued against credit card loans continuously rose throughout 2023-24.

In September 2022, the National Payments Corporation of India (NPCI)’s move to link RuPay credit cards with the Unified Payments Interface (UPI) also led to increased spending on credit cards.

According to 1Lattice, a tech-enabled decision support organisation, RuPay credit card transactions on UPI showed exceptional growth until late last year, with transactions almost doubling in six months by October 2023.

“The RBI is now closely watching this segment as the rise in NPA is worrisome,” a senior executive at leading private sector bank said on condition of anonymity.

Most card issuers have resorted to “reckless” issuance of cards often without undertaking the due diligence process and assessing the credit worthiness of the customers.

The exponential rise in co-branded cards has also contributed to the problem too. Banks and their partner merchants have regularly lured credit card customers with heavy discounts on purchases and several other sops.

The executive admitted that credit cards are often issued to customers without educating them about high interest rates and other fees. Interest rates on credit cards are much higher than other loans. On an annual basis, the annual interest rates often go beyond 40 per cent. “While selling credit cards, these important points are never explained to the customers…this adds to the problem,” the executive said.

Statista, a data portal, noted the transaction value of credit cards as compared to debit cards went up in the post-pandemic phase, even as India traditionally preferred using debit cards.

Although the credit card industry initially focused on high-income, salaried professionals belonging to Tier-I cities and having good credit scores, there has been an increasing trend of attracting a wider customer base and adoption by offering discounts such as reward points, cashback, and referrals.

“Rising expenditure, stagnant or decreasing incomes, and ease in availability of loans against credit cards have led to a substantial rise in NPAs in banks’ credit card segment,” said Abhilasha Jaju, Director of the BFSI vertical at 1Lattice.

Jaju pointed out that the share of loans against credit cards in total personal loans has been increasing since the onset of the pandemic. The share of credit card loans has risen from 3.9 per cent in July 2020 to 4.8 per cent in March 2023, he said.

A recent RBI report noted that in the case of credit cards, credit outstanding is higher for the below-prime borrowers suggesting “a higher flow of credit to relatively riskier borrowers.” Traditionally unsecured credit card and personal loans have always attracted higher risk weightage than housing loans.

A credit card loan which remains unpaid for 90 days from the payment due date mentioned is considered an NPA – loans that have turned bad.

RBI Action

In April, the RBI barred Kotak Mahindra Bank from issuing new credit cards after the regulator found “serious shortcomings” in the lender’s information technology (IT) management.

In a press statement it said, “Serious deficiencies and non-compliances were observed in the areas of IT inventory management, patch and change management, user access management, vendor risk management, data security and data leak prevention strategy, business continuity and disaster recovery rigour and drill, etc.”

Separately, the RBI issued a circular asking credit card issuers not to offer unsolicited loans or other credit facilities without seeking explicit consent. They have also been barred from unilaterally upgrading credit cards and credit limits. However, banking industry sources noted that in several cases, these directives have not been followed.

Rise In Personal Loans

Overall personal loan outstanding against borrower rose more than 27.5 per cent over the past year, from Rs 41,80,838 crore in March, 2023 to Rs 53,36,129 crore in March 2024. In the last few years, loans against gold and fixed deposits have risen too, reflecting an undercurrent in the overall economic dynamics.

The Secretariat earlier reported that the rapid accumulation in credit card outstandings and over 300-per cent growth in mortgaging gold are ongoing warning signs, pointing to the inability of Indian households to keep pace with increasing expenses.

In the early 2000s too, credit card NPAs had led to concerns. The spike in credit card defaults could prompt RBI to carve out more stringent measures for banks issuing credit cards.