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Credit cards the next big problem area?

It is not for the first time that credit cards have been in the news for the wrong reasons in this country or elsewhere. Among the fastest growing financial products, credit cards have substantially aided consumerism and in the process contributed to an alarming increase in the levels of indebtedness.

Ever since the card culture took hold in India and other developing countries, the exponential increase in the number of cards has brought in its wake numerous cases of default. The usurious interest charges levied on outstandings prompted the Reserve Bank of India to intervene belatedly.

The government-owned banks were late entrants to the business but in trying to catch up with the foreign banks and new private banks, they seem to have no viable business plan for credit cards. State Bank of India lost heavily on its card operations and has been revamping its joint venture with a leading multinational. Other public sector banks have not been so forthcoming.

It is for the RBI to compel all banks to disclose details of the credit card business. All banks are in the dock for using strong arm tactics to recover their dues. Many of the complaints have emanated from credit card users.

Recently in India, card issuing banks have been rapped on their knuckles once again for their failure to adhere to even elementary and commonsense norms. The banking system’s reckless fascination for credit cards is by no means unique to India and other developing countries.

In the U.S., amidst rising defaults and bankruptcies caused by a proliferation of cards, the Federal Reserve as well as the Congress are intervening to check some of the widespread abuses. However, the U.S. and other developed countries are better equipped to handle businesses such as credit cards. They have access to technology and perhaps more significantly to credit information.

It is not just the excesses arising out of credit card usage but the entire culture of encouraging the relatively vulnerable sections to pile up debt that has been in focus. For instance, the aggressive marketing of credit cards to students of top universities often in connivance with those who manage the universities has reached scandalous proportions. In a related development, students were sold excess loans which stretch their repayment capacities into their working life.

In India, the RBI, after studying numerous customer complaints received by it directly as well as by the offices of banking ombudsmen, has once again thought it fit to issue detailed guidelines. Credit card outstandings with all banks amounted to Rs. 26,596 crore as on May 13, 2008. Defaults have been rising significantly. This strongly suggests that banks have been issuing cards freely without an appraisal of the credit standing of the prospective card holder in many cases. There is strong anecdotal evidence that this is happening all the time despite previous regulatory warnings and the banks’ own unhappy experiences with defaulting card holders.

Credit cards for the asking — and sometimes even without asking — are just one facet of an aggressive strategy of pushing financial products. Besides, credit cards, retail loans and personal loans were popularised not through any informed educational campaign but merely to promote lifestyles. Most certainly, banks in India, the new generation private banks in particular but also government owned ones, have been pushing credit card sales and retail and personal loans as part of their new business areas.

Banks in India traditionally lent money against collateral and after satisfying themselves that there was a need. Trouble arose when such ‘conservative’ practices were replaced in a milieu where meeting targets became the main goal. Pointing out several deficiencies the RBI has asked banks to initiate the following remedial measures.

(1) Issuing unsolicited cards: As a rule no body who does not seek one should be given a card. In case such cards are issued, activated and billed without the customer’s consent, banks should not only reverse the entries but pay a fine amounting to twice the value of such outstanding.

(2) There have been instances of new cards being intercepted and misused by unscrupulous elements before they reach customers. The issuing banks will be responsible for such monetary loss. As a rule there should be safeguards against misuse. The RBI suggests one or other of fraud-minimising devices such as photo identity cards, embossing a PIN and signature lamination.

(3) Wherever cards have been packaged with an insurance element — commonly accident insurance — details such as the nature and extent of insurance, other conditions if any, should be explicitly stated. Also, the person in the insurance company who can be contacted by the customer should be mentioned.

(4) Reasons for rejecting a card application should be communicated to the applicants.

(5) Banks should get explicit permission from customers for sharing information about them.

(6) Customer education should receive top priority and cover the entire gamut of credit card operations. Illustrative examples should be used. Call centre employees should be suitably trained.

(7) Closure and blocking of lost cards should be given top priority.

It is difficult to imagine why these basic rules, by no means unique to credit cards, are being given a go by so extensively prompting another RBI warning. But then some banks adopt the most illogical practices when it comes to card issues.

One such practice ought to be familiar to all who have tried to return the cards issued to them.

They would have found that while it is the easiest thing to get a card — sometimes even without asking for them — returning them can be a daunting task. Many banks do not give their full postal address but only a box number.

Finally, one gets an uneasy feeling that the government owned banks are not adept at leveraging their strengths whenever they venture into businesses such as credit cards.

They are sitting over a gold mine of information. No foreign or new private bank has that advantage. Their numerous savings bank account holders alone would constitute a very valuable source of information for those marketing a credit card or any other product.

Often, these banks part with the data for a song and on occasions without even being aware of it. SBI’s joint venture was a fiasco. But many customers of SBI continue to receive unwanted calls from agents of sundry banks offering financial products including credits. Information has a price.

It is also confidential. Equally pertinent, did SBI get anything in return for passing on information of its large clientele?

C. R. L. NARASIMHAN

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