Credit card defaults to prove costly

Your credit card bill could rise if you do not have a good credit history. The interest rates on credit cards, which were hovering around three per cent, are set to cross the three per cent mark across the industry depending on the risk profile of the customer.

The annual interest rate on your credit card outstanding is expected to rise to around 37 per cent from the existing 36 per cent. In the retail portfolio, the maximum defaults are in the credit card segment and hence the interest rates have always been high. The average delinquency rate for the industry stands at around 8-8.5 per cent.

SBI Cards, the country's second largest credit card issuer, with a base of 35 lakh, has raised its interest rates with effect from May. The interest rate charged on SBI cards would now range from 2.5 per cent to 3.10 per cent compared with a band of 2.5 per cent to 2.99 per cent.

SBI Cards is a joint venture between State Bank of India and GE Money. "Interest rates are dependent on cost of funds. The interest rate on bank borrowings has increased. Taking this into account, we have decided to increase rates for select customers, based on their risk profile,'' said, Roopam Asthana, CEO, SBI Cards.

ICICI Bank, the leading credit card player with over 70 lakh cards, will take a call this week on raising interest rates. The bank's interest rate currently varies between 1.99 to 2.95 per cent. "Other banks have raised their rates. Our rates on credit cards have been at this level for a long time. We will take a call on raising rates next week,'' said a senior ICICI Bank official.

The Reserve Bank of India (RBI) had doubled the provisioning requirements on credit card receivables to two per cent in January. This was on the back of a phenomenal growth in credit card outstanding and the rising incidence of defaults. Despite the increase in provisioning, banks had not raised interest rates on credit cards. However, banks have withdrawn various benefits available on cards such as free insurance cover and dining privilege.

For ICICI Bank alone, defaults arising out of non-collateralised loans including credit cards and personal loans totalled Rs 1,668 crore at the end of March 2007, accounting for 54 per cent of the bank's gross retail non-performing assets.

Foreign banks such as Citibank and Standard Chartered Bank (SCB) have always followed a differential pricing structure and charge interest rates as high as 3.50 per cent based on the customer's risk profile. "SCB has always had a differential pricing structure for customers, based on their credit history. Very good customers enjoy interest rates as low as 1.99 per cent. Depending on the risk associated with the customer, the interest rates can be higher,'' said RL Prasad, head, credit cards, SCB.

Citibank has been following the dynamic differential interest rate programme since 2004. This provides preferential rates to long-standing customers and those with good usage and prompt payment records. The interest rates are as low as 1.50 per cent for some of Citibank's valued customers.