Credit card defaults rise on high rates, slowdown
CHENNAI: The economic downturn and rising credit card interest rates have led to significant rise in credit card defaults. Industry estimates showed that the default has increased by 50-70 % over last year. Credit card issuers charge interest rates as high as 3.4% per month compared to around 2.7% six months ago. High interest rates on plastics were explainable when RBI raised bank rates to 13-year high levels. But the same rates should fall as RBI has relaxed key rates, many said. But credit card issuers don't seem to be in a mood to lower rates.
"We have competitive rates when seen in light with the industry. Higher-end customers know how to use credit cards. But if you talk about lowering interest rates, it has never happened in the entire history of credit cards," said an official with a leading private bank. Cost of funds has also dropped by around two percentage points with RBI easing rates and norms. The official added that banks charge high interest rates on credit card debt as these loans are not backed by any collateral or security. But consumers feel that pressure should be mounted on banks to reduce rates as that have been reduced across the board.
The entry of new players in the last seven-eight months such as Axis Bank, Deutsche Bank and Barclays Bank has not led to reduction in credit card rates. A senior executive with a card company said: "More competition may not always translate to lower prices for consumers.
More entrants have come but credit card as a business has to be profitable. Default rates have risen and the macroeconomic environment is a major contributor in determining interest rates across credit products, including cards."