The increasing default in credit card liabilities has made the banking sector cautious during the festive season. According to recent data from the Reserve Bank of India (RBI), there has been a sharp decline in the pace of adding new credit cards in September, which dropped from 9.2 lakh new cards in August to 6.2 lakh in September. This represents a massive decline of 64% compared to last year, bringing the total number of credit cards to 106 million.
Analysts believe that due to the increasing risks in the unsecured division of credit cards, banks have now become more cautious in adding new customers. IDBI Capital analyst Bunty Chawla said HDFC Bank and SBI Cards have led the way in issuing new cards, but the pace of credit card distribution is likely to remain slow in the near future.
What does the report say?
RBI has recently changed the risk standards, under which higher risk weight has been applied to unsecured personal loans and bank loans to non-banking financial companies (NBFCs). Its objective is to control the growing risks in the credit card and other unsecured loan segments. HDFC Bank issued 4.3 lakh new cards in September, while SBI Card added 1.4 lakh and Axis Bank added 53,000 cards.
Whose cards are becoming default?
According to a report by Macquarie Capital, default rates in the credit card portfolio of banks are now running close to 6%, which is a matter of concern for the banking sector. In the report, Suresh Ganapathy, head of financial services research, said that the rate of credit card default is higher in the middle income group. Ganapathy says that after the RBI deregulated the scope of personal loans, the middle class is left with limited options to pay its dues, leading to a recession in urban areas.
Consumer spending increased during festivals
RBI data also shows that there has been a decline in the growth rate of transactions, which came down from 1.6% in August to 0.5% in September. However, the festive season witnessed an increase in consumer spending, resulting in total credit card spend increasing from Rs 1.69 lakh crore in August to Rs 1.77 lakh crore in September. This is an increase of 23.8% on year-on-year basis.
Why is default increasing?
Experts say young millennials often utilize their entire credit limit, resulting in rising defaults and many accounts turning into non-performing assets (NPAs). RBI has recently instructed banks and NBFCs to exercise caution while giving unsecured consumer loans.
