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Lenders rein in on credit cards as bad pay up edges up this festival season

Submitted by admin on November 18th, 2024

Banks are pulling back on new credit card issues this festive season because of the delinquencies; Aspiring consumers are colouring the picture as they unravel high default rates in unsecured lending.

Fears of increased delinquent in credit card receipts are forcing the banks to pull in their horns when it comes to floating fresh credit cards during the festive season.

The RBI data of cards shows declining trend of new cards which went from 920,000 in August to just 620,000 in September. This is nearly one-third down on last year and the Trade Federation has blamed changes in the climate for the drop in sales of these vehicles.

The number of cards issued this year is significantly lower than that of the previous year.

New credit card issuances are down by more than 64 per cent compared to the same period last year, and there are now 106 million active credit cards in the country.

It may continue this manner in future as analysts point out that the segment could face future challenges due to reduced risky loan book especially credit cards, as reported in The Economic Times.

According to the report, analyst at IDBI Capital Bunny Chawla identified that new card issuances was being dominated by HDFC Bank and SBI Cards.

But going forward, Chawla forecasts that net new card additions might come down as the delinquency rate in credit card receivables has been on an upswing path. He also said that lenders are also being careful on new card disbursal as RBI has set risk weight norms.

September saw HDFC Bank launching 430,000 new credit cards, SBI Cards issuing 140,000 and Axis Bank launching 53,000. While the credit cards were issued, the overall net increases of credit cards of ICICI Bank merely increased by 4,000. Rising default rates

Macquarie Capital has pointed out that default rates in banks’ credit card portfolios are getting to 5.9%, a number that cannot be observed for several years.

The report’s source, Suresh Ganapathy, head of financial services research at Macquarie Capital, tagged the default pressure crisis for credit cards in the middle-income group. This is so particularly because options to consolidate debt, such as through personal loans, have closed up due to RBI measures.

He also said that pressures on the middle class to spend more and slow growth of urban economies are becoming more evident.

High festival spending

However, transaction velocity declined from 1.6% in August to 0.5% in September, although overall credit card spending rose during the festive period.

Total spends on the cards increased from Rs 1.69 trillion in August to Rs 1.77 trillion in September.

This show that it has a 4.7 per cent M-o-M rise and record a significant 23.8 per cent Y-o-Y figure.

Though RBI has been encouraging consumption credit, it has shown worries over the unsecured lending segment, and Bank should go slow on personal loans targeted at consumption. To contain rising stress in unsecured consumer lending, the RBI in November 2023 has increased risk weights on unsecured credit, including personal loans and bank credit availed by NBFCs, the report added.