On Tuesday, 24 June, सिर्फ़ News received a mail with the request to publish it in the form of an article. Our edited version follows:
Credit card interest rate, role of CIBIL and its effect on Society
We would like to draw your attention to a serious issue of credit cards and the role CIBIL plays in regulation of the market. A bank is a financial institution with a social duty. Post-Independence, banks were nationalised to curb the evil of local moneylenders and to provide regulated and transparent credit facilities to Indian citizens and business organisations. In an agrarian economy like ours, government-sector banks have a great role to play and, to a great extent, they have contributed to providing credit to individuals, small business organisations as well as farmers. After 1990, the economy opened up and banks began providing credit cards with unsecured credit facility, depending on applicants’ respective incomes. It was a good tool for individuals to begin with.
With the change in people’s lifestyle in a liberalised India, as lakhs moved out from villages and towns to other States or cities in search of jobs or better livelihood opportunities, their practice of taking short term loans from relatives and acquaintances without interest gave way to professional borrowing. Change in the social structure and new requirements forced them to apply for short-term credits. Banks started providing credit cards to individuals based on their income. Easy credit facility brought great flexibility and positive change. During that period, credit cards offered a credit period of 40-55 days, easy EMI conversion facilities to customers who couldn’t pay the whole amount in one go and 0% balance transfer to enable customers to transfer the balance amount to different cards and save on the interest amount. This helped the middle class afford a certain lifestyle.
The scenario now is but worrisome. EMI facilities have almost been withdrawn by banks. The balance transfer facility has ceased to exist. A penalty of Rs 300-Rs 1500 for payment delayed just by one day is a scary proposition. Furthermore, rate of interest of 36%-48 % per annum is levied by the bank. Add this to the 12.36 % service tax on interest amount by the Government of India. Finally consider the rating by the Credit Information Bureau (India) Limited (CIBIL), and you are into a vicious debt trap.
There appears a nexus between CIBIL and credit card agencies. This new authority, which determines the credit facility to be given by banks, was initially considered helpful to customers, but now it has become tool of harassing customers. If the payment is late, your credit rating goes down. Other credit facilities extended to you are withdrawn. The customer is forced to pay interest at the rate of 3.5% to 4.5 % per month, which is higher than what petty moneylenders charge. Due to the low rating by CIBIL, the customer is denied financial assistance by other institutions. Even a home loan is no longer possible. The person’s business suffers due to lack of liquidity.
Worse, if the credit card holder is unable to make the payment, goons of bank start threatening him. The victim loses self-esteem and turns a bonded labourer for banks as the debt simply refuses to vanish. The modern avatar of Shylock of The Merchant of Venice employs recovery agents whose modus operandi is uncivilised and inhuman. Reports of some of those who were harassed committing suicide have appeared in the media.
There should, therefore, be a nominal interest rate (less than 1%) on delayed payment. A bank charges 2%-3% from the merchant at the time of a good’s purchase if the payment is made by a credit card. The bank’s profiteering begins right there. So, why does it need to a substantial penalty for late payment, too? It should not be more than Rs 100. An option of easy EMIs must be offered to the defaulter.
The CIBIL was formed to protect the customer, but it has become a tool of harassment in the hands of credit card companies. Its original purpose must be restored. Then, purchases using credit cards should not be considered unsecure loans because the credit has been granted to a person who earns through legal means and is a responsible citizen; these are facts established by the scrutiny of the citizen that takes place before handing over the card to him. It is issued on his goodwill so it should not be considered as unsecure loan. If it stays as a bad debt in the bank’s books, the customer cannot be forced to pay the due. Payment collection methods should be within the framework of laws of the land. No goons or a third party should be sent to the customer’s premises. No service tax should be charged on the interest rate as it forces the customer to pay interest additional to the taxes on that interest.
Agencies like CIBIL must be banned and banks should not share information of their customers to a private bodies like CIBIL. If banks take themselves for business instituions, they should not employ a gang for recovery. If a bank or credit card company shares information to any private institutions like CIBIL it needs to be considered a fraud with consumer and the bank involved needs to be penalised for that.
Editor’s note: The piece above smacks of ignorance about the credit card market, not to talk of the effort that went into correcting its English. It also spoke of credit card facilities being introduced under the National Democratic Alliance Government, which is not true and was, hence, expunged. The CIBIL, for instance, was created not to shield customers but to develop in the country a standard for credit services. Credit rating of a person or organisation is a standard practice in several advanced economies, and citizens who are not rated are not considered credible. To that end, the state starts encouraging every member of society to buy some things on credit right from the stage of his or her teens so that he or she can be rated. While such consumerism need not be promoted in India, rating a citizen is certainly an idea whose time has come in this country as well after almost two decades of credit card services. Then, the money a credit card holder owes to his bank is indeed a bad debt, which the sender of the mail does not appear to know. The mail also seemed to suggest it was morally alright to borrow and flee! Given the amateurish presumptions and demands, we forwarded the mail to columnists who dwell on economic and commercial affairs. Following is the reaction from Sandeep Bansal who is a regular contributor to centreright.in:
While I agree with the central theme of the article that credit cards are a menace, there are several points made in the article that I disagree with, particularly those relating to CIBIL. This authority was founded in August 2000. Its role is to maintain records of loans and credit cards. These records are shared by member banks with CIBIL on a monthly basis. Based on this information, CIBIL furnishes a score which is, in turn, used by banks to process loan and credit card applications.
The CIBIL score is important because it provides information to the bank about the track record of the customer and also about his other loans and credit cards. Based on this, the bank can gauge the individual’s repaying capacity.
The mail asserts that CIBIL has become a harassing tool for the customer. It must be understood that credit card customers are not the only customers of the bank. Depositors are at the core of banking; banks operate on money borrowed from the depositors. Hence, it is absolutely essential that banks get all the information while deciding on credit applications or loans.
For instance, a credit card applicant may already have multiple other credit cards and have a huge amount as debt on him. Any default could jeopardise the savings of the depositors. Hence, the suggestion that the CIBIL should not share information with banks is completely wrong.
That said, certain problems with the credit card industry do exist. Credit cards offered by banks typically offer a credit period of 30-45 days. These are usually unsecured. Further, banks offer rewards points and cashbacks, all this just to attract customers to spend more. A bulk of the credit cards offered in India do not have any annual fees associated with the card. There is no charge in case the customer makes his payments on time.
An important question therefore arises: How do banks make profit from credit cards? The answer is, banks make profit only if there are enough people defaulting. Banks typically charge high interest rates, 3%-4% a month. Many banks also charge a late payment penalty.
Just yesterday I received a call from my bank offering to double the credit limit on my card. Banks are offering incentives to people to spend beyond their means and increasingly getting too aggressive about it. This is a dangerous, vicious cycle wherein people are being encouraged to fall into a debt trap. In many cases, a default of a few thousand rupees balloons into lakhs in no time, given the high interest rates charged by the bank.
Once a customer defaults, banks use high hand methods to recover money. Several banks are reported to used goons to scare customers. A new and novel trick is now being used. Banks have two arms — a recovery arm and a debt doctor. A debt doctor helps a defaulter in negotiating a settlement with the bank.
As an article in MoneyLife reported, a defaulter got a notice from his bank. Within days of receiving that notice, the defaulter got a marketing call from the debt doctor offering various credit repair packages. These were a ‘Gold’ package priced at Rs 7,500, ‘Platinum’ at Rs 11,000 and ‘Titanium’ at Rs 16,000.
Once the defaulter signs up for credit repair, there is a quick settlement. In one case that I have accessed, there was a demand of over Rs 11 lakh, when the original default was just Rs 17,000. It was settled at Rs 1.5 lakh. Another legal notice for Rs 10 lakh+ was settled at under Rs 50,000. This is surely a very profitable — but shady — business.
Credit Cards encourage profligacy; they encourage people to live beyond their means. Debt is considered to be good if it is spent on long-term assets rather than short-term happiness. But the problem with human beings is, their desire is insatiable. In their desire to feel good about themselves and to impress peers with, say, new mobile-phones or an expensive dress, people can go and live well beyond their means, which might have disastrous consequences in the long run.
Disclosure: I have three credit cards. I use them judiciously and pay my bills on time and say a polite “no” to offers on limit increase.