Banks block inactive credit cards

Dilip Kumar didn't use his ICICI Bank credit card for 14 months; Nazneen did the same. The bank responded by blocking their credit cards.

ICICI Bank isn't alone. Several credit card companies have started blocking under-used cards to save cost and avoid potential defaults.

As a result, the latest data released by the Reserve Bank of India showed that the card population dropped to 25.51 million at the end of February, the lowest level in 15 months.

On an annual basis, the number of cards fell by 1.36 million, or 5 per cent, between February 2008 and February 2009. The credit card base shrank by 359,000 in February.

"Cards that are not active have a cost attached to them," said the head of the cards business with a foreign bank.

The cost of each statement generated and posted is around Rs 10. In isolation, this cost may look negligible. But a bank with two million customers spends Rs 2 crore (Rs 20 million) a month on this communication and Rs 24 crore (Rs 240 million) annually. Then, there are card replacement charges that a bank has to bear when the validity expires.

Cancelling inactive cards also helps a bank save costs attached to the contact centre. "The capacity of the customer service centre depends on the number of cards," said the head of cards with an Indian bank.

Issuers also say owners of inactive cards can be potential defaulters too. Customers who have not used the card for a year or more and then suddenly do so tend to be facing financial problems. Such customers would not opt for such unsecured lending if they weren't, issuers said.

Most bankers expect the number of cards in circulation to fall further in the last quarter of the financial year 2008-2009, when there is pressure on issuers to clean up their balance sheets.

"Banks will focus on reshaping their portfolios and improving profitability, rather than gaining volume," said RL Prasad, general manager of credit cards and personal loans at Standard Chartered Bank.

As banks reduce the number of credit cards, customers are also cutting back on spends. The average spend on a credit card dropped over 5 per cent from Rs 1,928 in February 2008 to Rs 1,826 in February 2009.

In addition, the average amount spent per credit card transaction declined 8.7 per cent to Rs 2,377 in February 2009, against Rs 2,605 in the corresponding period last year.

With non-performing assets in the card segment rising to over 20 per cent for some banks, against 5 to 6 per cent in the last financial year, card issuers have become more careful about client profiles.

To keep a check on bad debt, banks have also been blocking cards if they sense that a customer is a potential defaulter.

Data from the credit information bureau is proving handy. Issuers block cards if they discover that the customer has exposure to a high number of cards or has defaulted with another financial institution. Deutsche Bank, for example, has blocked cards of several active customers.

"Credit card companies have realised that a smaller portfolio with good customers is key to this business," said the head of a credit card division, on condition of anonymity.