Credit card defaults surge sharply in FY22-23; up 30.5% YoY at Rs 4,073 cr

The total credit card outstanding at the end of March 2023 was Rs 1.94 lakh crore as against Rs 1.48 lakh crore at the end of March 2022, the RBI’s monthly sectoral bank credit data showed. Total number of credit cards increased to 8.53 crore in FY2023 from 7.52 crore in FY2022.

The recently released Financial Stability Report (FSR) of the RBI said that while there was an overall improvement in asset quality in respect of personal loans, impairments in the credit card receivables segment rose marginally in fiscal 2023.

During the previous fiscal, the banking system’s gross NPA ratio in credit card receivables stood at 2.02 per cent, the RBI said in a reply to an RTI filed by The Indian Express.

The FSR report showed that public sector lenders’ gross NPA in the credit card segment was 18 per cent while private sector banks reported a GNPA of 1.9 per cent in FY2023. Foreign banks’ credit card gross NPA ratio was 1.8 per cent during the previous fiscal. Bankers say stress in credit card loans is mainly seen in the low-ticket segment, that is, below Rs 50,000.

In credit card accounts, the amount spent is billed to the card users through a monthly statement with a definite due date for repayment. Banks give an option to the card users to pay either the full amount or a fraction of it, i.e., the minimum amount due, on the due date and roll over the balance amount to the subsequent months’ billing cycle. In case of defaults, banks charge interest rates as high as 38 to 42 per cent on outstanding dues.

A credit card account will be treated as a non-performing asset if the minimum amount due, as mentioned in the statement, is not paid fully within 90 days from the payment due date given in the bill. It will also affect the credit rating of the card holder.

In the year ended March 2023, the composition of secured and unsecured advances changed, with unsecured retail loans increasing from 22.9 per cent to 25.2 per cent and secured loans declining from 77.1 per cent to 74.8 per cent, the FSR report said.

With the rise in delinquencies in unsecured advances such as personal loans and credit cards, the RBI has been asking banks to exercise caution while lending to this segment of borrowers. An unsecured loan is a loan where a borrower is not required to provide any collateral, or security, to a lender in order to avail them. These loans are offered based on the creditworthiness of borrowers.

If there is a default on an unsecured loan, banks do not have any recourse as there is no collateral involved. This could pose a risk to banks’ asset quality.