NPAs in Indian credit card business rises

The cost of acquiring new cardholders is quite low for domestic card issuers by international standards, but net credit losses are comparatively high, a study commissioned by the Indian Cards Council (ICC) revealed.

The report by ICC, which is an association of Mastercard Worldwide's banking partners in India, said very low costs associated with the new cardholders might indicate that insufficient resources were being applied to the credit worthiness of the applicants.

Ten members of the ICC participated in the study according to which the cost of acquiring new cardholders for Indian issuers was Rs 590 per active card per year as against Rs 3,850 and Rs 4,020 in the US and Australia, respectively.

On the other hand, credit losses were Rs 3,420 per active card per year compared to Rs 3,070 in the US and Rs 1,220 in Australia, although the purchasing power of Indian consumers was lower compared to the customers in these markets. Also, Indian customers use their cards less frequently and for lower amounts.

The study also found a high level of inactive cards among Indian issuers  only 56 per cent of cards were active as compared to 80 per cent in Australia and 75 per cent in Singapore.

With the non-performing assets in the card segment rising to over 20 per cent for some banks, as compared to 5 to 6 per cent in the last financial year, card issuers have become more careful about who they give the cards to. They have started blocking inactive cards to cut down on costs associated with billing and mailing.

Card issuers also fear that owners of inactive cards are potential defaulters who would use their credit cards to access funds when faced with financial problems.

Data released by the Reserve Bank of India showed that the card population dropped to 25.51 million by February-end, the lowest 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.

The ICC study further observed that the geographical markets in which issuers normally charge annual fees to cardholders have a higher percentage of active cards.

A majority of card issuers in India do not charge annual fees on their basic product.

But faced with rising NPAs and a falling number of transactions, banks have become more amenable to the idea of reintroducing cards fees. It is a good time to bring card fees back, said an executive with a foreign bank who did not want to be identified.