Banks and credit card companies could end up getting a bonanza if card users utilise the RBI moratorium and roll over their monthly card repayments by three months. With total card outstandings touching Rs 1,10,000 crore, banks stand to earn up to Rs 10,000 crore on accumulated interest charges for the three month period if all customers were to roll over their repayments.
The Reserve Bank of India (RBI) has allowed moratorium on repayment for three months, but it has not waived the interest charge for the three months. Normally, banks and card companies charge up to 42 per cent per annum interest rate on unpaid balance outstanding on credit cards.
“It makes sense not to use the moratorium on card repayment. After three months, banks will ask you to shell out the huge interest charge for three months. The interest rate ranges from 36 to 42 per cent. It’s not 8 or 10.5 per cent as in home loans. If a customer has the means to repay card dues, he should continue making repayments,” said a banking source.
If a card holder has Rs 50,000 card outstanding, he will have to pay over Rs 5,000 as interest charges for the three month period. This will be added to the principal outstanding dues. If a customer pays only ‘minimum due’ amount – which is around 5 per cent of the outstandings – by the due date, the payment of the balance will come at a huge cost, i.e. 36-42 per cent interest rate.
“It would be better if credit card customers pay dues by taking a personal loan at cheaper rates,” said an SBI official. “If a housing loan is deferred, it would be at 8-10.5 per cent, in personal loan it’s 16-22 per cent, working capital 15-20 per cent. In credit card, it’s up to 42 per cent.” Interest charges during the moratorium period on term loans are also carried forward, but rates on many of these loans are reasonable.
As per RBI data, there were 5.61 crore credit cards in the country, as of January 2020. The total card outstandings as on January 31, 2020 were Rs 1,10,864 crore, showing a spike in growth at 31.6 per cent on a year-on-year basis.
Though the interest rate in the banking system has been coming down in the last one year, interest rate on credit card outstandings has not fallen. Users say the credit card interest rates are outrageous and there’s no justification to charge such a high interest rate.
According to bankers, defaults in card repayment affect the credit rating of the customer. “Even missing an installment can bring down the rating. It’s better to pay up outstandings as early as possible without utilising the benefit of moratorium. We don’t expect all card users to use the three-month moratorium on card repayments,” said a banking source.
The high rates on credit cards — considered unsecured debt — are not unique to India alone. In Canada, where normal policy rate is 0.25 per cent, credit card interest rates are between 20-30 per cent. The average credit interest rate in the United States is lower at 16.69 per cent, down by 111 basis points since July 2019.
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