FACING A surge in defaults by credit card customers, with the Covid lockdown leading to layoffs, salary cuts and closure of units, banks have started approaching card holders for settlement of dues at “terms that are beneficial to the borrowers”.
SBI Cards, a leading credit card issuer, has seen its gross non-performing assets shoot up to 4.29 per cent of gross advances as on September 30, 2020, as against 2.33 per cent on September 30, 2019. Impairment and losses jumped from Rs 329 crore in the September 2019 quarter to Rs 485 crore in the June quarter of 2020-21 and Rs 862 crore in the quarter last month — a 162 per cent rise.
Sources said that with apprehensions of a spike in NPAs from the third quarter, banks are working on resolution of outstanding amounts wherever possible. “Settlement in credit cards is relatively easier to execute and frees up the banks’ capital, apart from the effect on quality of the loan book. While corporate loans will be restructured based on guidelines of the Kamath committee, banks are being proactive to ensure resolution wherever feasible for retail loans,” said a senior banker.
The banker said that many banks are approaching customers selectively to settle their dues with a haircut or reduction in value — or repayment at a discount.
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Banks and card issuers have managed to show lower NPAs so far due to the moratorium that was valid till August 2020 — the issue of interest waiver is being heard in the Supreme Court.
According to banking sources, a clear picture will emerge when PSU banks report their September and December quarter results. Though the moratorium ended on August 31, many customers are yet to pay up as banks have not yet started showing defaults as NPAs.
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With interest rate on unpaid balances at over 40 per cent per annum, overdues will be a big burden on customers and can skyrocket, said officials. “There’s no collateral on credit card dues of a customer. If the customer refuses to pay up, it will become an NPA. Banks will try to avoid this scenario. The latest government scheme on cash-back is a small relief,” said a senior official of a nationalised bank.
In its scheme for providing compound interest relief to borrowers with loans up to Rs 2 crore, the government has said that in the case of credit card dues, the rate of interest will be the weighted average of lending rate (WALR) charged by the issuer for transactions financed on EMI basis. The computation of WALR should be certified by the statutory auditor of the card issuer. Since the WALR is much lower than the actual interest rate on credit cards, customers with unpaid liabilities will have to pay a significant portion of the compound interest along with interest on dues.
The latest move by banks comes at a time when credit card outstandings declined to Rs 104,833 crore as of August 2020 from Rs 108,094 crore in March 2020, according to RBI data. Monthly credit card spends have reverted back to pre-Covid levels with banks reporting spends worth Rs 50,311 crore in August 2020 against Rs 50,574 crore in March 2020. However, this was still lower than Rs 60,011 crore in February 2020. “We expect the upcoming festive season to boost credit card spends,” says an ICICI Securities report.
At the same time, experts pointed out, banks and credit card issuers have refused to bring down interest rates on outstandings even though interest rates are going downhill following successive rate cuts by the RBI.
Many banks have increased the rates on card outstandings — in some cases above 40 per cent per annum. Earlier this year, Citibank India hiked the interest rate on credit card outstandings by up to 480 basis points from 37.2 per cent to 42 per cent per annum. The interest-free credit period could range from 20 to 50 days, subject to submission of claims by the merchant. However, this is not applicable if the previous month’s balance has not been cleared in full or if the cardholder has availed of cash from any ATM.
Sources said banks and NBFCs are pruning their portfolio of unsecured loans like that on credit cards, personal loans and risky credit, like loans against securities, due to uncertainty over incomes. The focus is shifting to collateral-backed credit like home, vehicle and even gold loans, they said.
For instance, the country’s largest NBFC, Bajaj Finance, grew its asset under management (AUM) for mortgages by 14 per cent in July-September 2020 over the same quarter last year, while auto finance business grew by 7 per cent. However, sales finance business contracted 42 per cent and securities lending business by 26 per cent.
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