The Hindu Business Line : Not quite creditable

WITH THE EXPLOSIVE growth of credit cards — especially after the large number given free — to 13 million in circulation, it is no surprise that the Reserve Bank of India has turned its spotlight on this segment. As a source of additional purchasing power, the credit card no doubt can upset the RBI's monetary policy calculations. But even so, the RBI's concern about its proliferation and the prospect of profligate spending by retail households as to cause a system-wide crisis seems rather alarmist. After all, the Indian credit card market is still in its infancy. While the card industry has been growing at about 40 per cent, it has penetrated but 20 per cent of the potential market for such a service.

The RBI's proposal that banks set a common credit limit for individual card members bristles with practical difficulties. There are no credible universal benchmarks and banks adopt different approaches to measure customers' repayment capability. Bankers are privy to a lot of information on income levels, demographic details, collaterals, repayment records, length of relationships, and so on that could enable them set different credit limits for their customers. If there is going to be any consensus approach to setting individual credit limits, these data will have to be shared among banks. With such credit intelligence acquiring value in the context of cross-selling of diverse consumer products, it is doubtful if there would be a ready sharing of such information. A consortium approach to lending, with a lead banker doing the credit appraisal and farming out the risk to other banks, may not also be feasible. Not surprisingly bankers have expressed reservations about the practicality of the idea of a cap on credit limit.

In the final analysis, a credit card is a device for the grant of a cash credit limit to individual households. But in the race to grab market share, banks appear to have thrown caution to the winds forsaking all traditional norms of eligibility and diluting the due diligence in credit appraisal. Today, all and sundry are plied with credit cards even when they do not need one. Often one is the beneficiary of such a facility by the simple process of being added on to someone who already has a card, probably quite undeservedly too. Or at least not for the sum sanctioned. To compound matters, the spends on these add-on cards are more than on the original card. One's status as a successful borrower of home loans or motor vehicles also fetches yet another credit card.

When banks acquire customers indiscriminately, without enquiring into past transactions (or ignoring them) and allow multiple banking arrangements, they are cutting at the foundation of a stable system. Giving five or six cards with generous credit limits to persons incapable of taking and servicing a single card is a recipe for disaster, not only for the receiver but also the giver. Having said that, any regulation of card usage at this stage seems a bit premature.

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