Ajit Balakrishnan: If you are Sikh, Muslim, a scribe ...

PEOPLETECH

A lawyer, a software professional or self-employed, you will have a tough time getting a credit card in India. The credit card industry believes that it's just too risky to let you have one.

But this is not a story about bigoted credit card companies. This is about how a laissez-faire approach by government regulators can lead to the law of the jungle in which ordinary citizens will suffer.

Let's first start with why credit card companies use these obviously medieval practices in approving credit card applications.

They believe they have heard of enough instances where a lawyer delays payments, the credit card company pursues him too energetically and the lawyer fends them off by filing a frivolous case that takes many years and much expense to resolve. Hence, it is more prudent to deny cards to lawyers.

They believe they have heard of enough cases of delinquent journalists who have been writing negative articles about his "harrowing experience" in an attempt to evade the bill collector.

They believe they have heard of enough delinquent software professionals who have taken assignments abroad to keep out of reach.

They believe they have heard of Sikhs or Muslims living in enclaves like Bombay's Mohammed Ali Road physically threatening bill collectors who go there to collect delinquent accounts.

They believe self-employed people have no predictability to their income and thus find it difficult to meet their fixed monthly payment obligations.

The customer they love the best works in a salaried job in government or in a large, well-known private sector company.

The credit card companies that adopt these practices are not, as you may imagine, unprofessional holes-in-the-wall operators. They are among the most prestigious professionally managed corporations in India and are otherwise exemplary in their dealings with their staff as well as their customers.

They are forced to do this kind of profiling because the credit card industry in India is forced to grope in the dark.

Though the small plastic card issued looks the same, a credit card is different from a debit card in that it does not remove money from the user's account after every transaction. In the case of credit cards, the issuer lends money to the user; a credit card allows the consumer to "revolve" their balance, at the cost of having interest charged.

When they issue you a credit card, they have no way of knowing what other credit cards you may already have and how much of a balance you may have run up against each. When you pay their monthly bill, for all they know, you could be drawing on another credit card to do this, merely rotating their credit. If you abandon a credit card after running up a large balance and apply to another credit card company, that company has no way of knowing that you owe dues to the first company.

In countries with more evolved financial systems, credit card companies are protected from such risks by a credit information-sharing system. Information about users who are delinquent in their payments with one credit card company is made available to all other credit card companies. The consequences of delinquency are so severe (you may not get a card for some years) that by and large consumers meet their payment obligations.

India did set up such a common credit-rating bureau under the Reserve Bank of India, but foot dragging by the incumbent leaders of the credit card industry and lack of focus by the authorities have prevented this institution from performing its duties.

Add to this the perception among our policymakers that credit card usage is something for the well-to-do; the finance ministry issues threats from time to time promising investigations of all credit card high spenders to check if they have filed their income tax returns.

The consequence of all this is that India has just 10 million active unique credit card users while this by any account should have been closer to 50 million.

Widespread credit card usage would support the nascent modern retail sector, stimulate ecommerce in the country, and reduce the use of cash in retail transactions. It is an essential part of modernising the financial system.

The credit card industry performs far below its potential in India because the regulators haven't done enough to herd all the players in the credit card industry into a common credit-rating system.

Perfectly credit-worthy Sikhs and Muslims, journalists, software professionals and self-employed businessmen are denied credit cards merely because they are "profiled" as belonging to a category. And bill collection is governed sometimes using the laws of the jungle.

The past excessive role of the government in economic matters has made us all look askance whenever the government steps in but it is important that the government does what it legitimately must do: function as a strict umpire such that all economic players play by the rules. This is the only way by which ordinary citizens get their due rights.

Too little government can be as dangerous as too much government.

Comments welcome at
ajitb@rediffmail.com