Devangshu Datta: Pick a Card, Any Card

VIEWPOINT

Australians borrow a phrase from Barrie when they refer to credit card and hire-purchase expenditure as "living on the never-never". This is because you never, never, finish paying off your CC bills. In Australia, everybody seems to finance a higher standard of living by spending their future incomes. The consumer savings rate is often negative there and in the US as well. (The calculations ignore capital gains and so perhaps, these are misleading.)

Some key factors drive CC usage in developed economies. Cards are cheap. The interest rates don't have exorbitant spreads. Often, there are zero or nominal annual fees. These are cashless highly-indexed economies where everybody, including dope-dealers, files an income tax return.

There are efficient debt-appraisal and debt-recovery systems. Credit-rating bureaus make it easy to assess how much consolidated debt an individual can service and allow the setting of realistic limits. If an asset has to be repossessed or a defaulter made to pay up, it can be done quickly and painlessly through due process of law.

Of course, there are problems. People kite cards, cycling bits of plastic close to the limit in succession. A high-flier in a good job gets the pink slip and that leads to default. There are huge gaps in online security leading to scams and scandals. But by and large the market works.

India is a very different kettle of fish. The card issuers are all pretty aggressive. Until the RBI's recent issue of guidelines, it was pretty much a given that every week's mail contained an unsolicited, pre-activated card with free first year usage and various goodies. It was then a painful job, destroying the card and informing the issuer because, if you didn't, you would be served with a bill, 13 months down the line.

The credit-rating system is inefficient; every issuer assumes no other outflows of debts when setting limits. This leads to hilarious situations. A salaried person can easily get 15-30 per cent of annual income as the limit on a pre-activated card, from each and every card-issuer. He can also, regardless of card usage or limits, negotiate a house-loan at an EMI of about 60 per cent of his monthly pay cheque.

The issuers share or steal each other's databases but they don't apparently consolidate data on credit limits. If you've been approved for a card, you can be sure that three other wannabe-issuers will call within the week with bigger and better terms. If you take them all up on their offers, finance a house and chuck in a car on hire-purchase, you will really be living on the never-never in a way that few Antipodeans would ever imagine.

When the defaults come, the tardiness of the law gets in the way of normal recovery. The due process is so painful and it's easier for the lender to use goons and risk the occasional bout of bad publicity and miscarriage of justice. I wonder whether the new RBI guidelines on debt-collection agencies (aka goons) will make much difference.

And, of course, the war stories abound. There's an old Soviet joke about the happiest day in the life of Ivan Denisovitch. Ivan Denisovitch awoke one night to the KGB kicking in his door, dragging him out of bed and announcing: "Ivan Petrevitch! You are under arrest!" It turned out to be the happiest day of his life because he could say "Ivan Petrevitch lives next door".

I was reminded about this when I heard of the MNC executive VP, "P R Sharma", who was dragged to court to pay the debts of the previous incumbent of that post, one Mr "R P Sharma". Yesterday I heard about the placement agency which had to bail out its peon who ran up a bill he couldn't pay. As the issuers get more aggressive, the stories will get weirder. The RBI guidelines won't be enough unless the courts clean up their act.