"The RBI should review this matter and re-formulate the norms governing credit card services with a view to providing the much-needed relief to the general public," the committee said in its report. Most companies charge interest rates of nearly 3% a month on credit card outstanding, which on annualizing works out to more than 40% per annum.
In its report the committee notes: "Banks have been given complete freedom to charge rate of interest regardless of their benchmark prime lending rates, thereby enabling them to charge exorbitant and usurious interest."
Credit card companies argue that the rate of interest charged is high because the credit is totally unsecured, carrying the highest risk. The high interest charged covers up for the risk for the greater default in the case of credit card lending.
Source: Economic Times Credit card maths riles House panel
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By ugesh sarkar, Section Banking & RBI
Posted on Mon Dec 14, 2009 at 02:18:16 AM EST
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NPAs in the credit card segment are indeed over 15% for many lenders, underscoring the risks inherent in the business. Defaults are higher because credit card companies rely on internal due diligence while giving out cards.
With Credit Information Bureau of India (CIBIL) functioning now, credit card defaults should come down.
Card issuers will have better access to credit history of applicants and card users will also be more careful as a poor credit history could deny them credit later.
Typically, credit cards account for a tenth of retail lending of an aggressive private sector bank, almost on a par with personal loans. The finance ministry in its submission to the committee said: " Credit card dues are of nature of non-priority sector personal loans and banks are free to determine the rate of interest on credit cards without reference to their benchmark prime lending rate and regardless of the size."
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