Plastic fantastic for Indian banks

Two years after millions of credit cards were cancelled because of delinquencies, Indian banks are aggressively promoting plastic money.

As India's economy expanded in recent years, millions of upwardly mobile middle-class people embraced debt-fuelled consumerism. Brian Sokol / Bloomberg

MUMBAI // Two years after millions of credit cards were cancelled because of record delinquencies, Indian banks are aggressively promoting plastic money again to boost profit margins hit by high interest rates and growing competition.

This week, HDFC Bank, India's second-largest private-sector bank, unveiled its "Infinia" cards - an invitation-only credit card for the super-rich. For an annual fee of about US$700 (Dh2,570), the cardholder will have no spending limits and will receive insurance benefits and access to more than 600 airport lounges around the world.

The interest rate is fixed at 1.99 per cent per month, the lowest in the industry.

"This will be a card of choice for India's super-rich," said Aditya Puri, HDFC's managing director.

IndusInd Bank, promoted by the Hinduja Group, launched a credit card last month with the aim of tapping India's growing high-net-worth individuals with assets exceeding $1 million. The number of such individuals grew 20.8 per cent last year to 153,000, according to the World Wealth Report by Merrill Lynch Global Wealth Management.

The bank had acquired Deutsche Bank's loss-making credit card business - with more than 200,000 customers - in April for an undisclosed sum.

"We believe the credit card industry is at the take-off stage after many years of bloodbath," said Romesh Sobti, the bank's managing director and chief executive. "We are seeing the beginning of the revival of this business."

Indian credit card transactions increased by 32 per cent in May to 78.81 billion rupees (Dh6.5bn), compared with the same month last year, according to the Reserve Bank of India (RBI). The transactions rose even though the number of credit cards dropped to 17.6 million in May from 18.1 million in February.

As India's economy expanded in recent years, millions of upwardly mobile middle-class people embraced debt-fuelled consumerism, unlike the frugal generations before them who baulked at the idea of spending on credit.

Optimism about brisk economic growth gave rise to an era of excess as an increasing number of Indians resorted to debt to finance their growing appetites for swanky cars, mobile phones, plasma televisions and other quintessential symbols of middle-class aspirations.

But this is a vastly underpenetrated market. Spending on credit cards totalled 755bn rupees in the year that ended in March, according to the RBI. This is barely 4 per cent of all retail sales.

Despite opportunities for growth, banks are expanding cautiously, tapping mainly high-end clients with clean credit repayment histories.

More banks are now affiliated with the Credit Information Bureau, a government body that provides information on individuals' borrowings and bill-paying habits, details that help banks to evaluate creditworthiness.

Between 2005 and 2008, the number of credit cards jumped three times, peaking at about 30 million.

But the number fell to fewer than 20 million the same year because of rising customer defaults and growing losses for banks.

With its mounting losses, ICICI, the industry bellwether and India's largest private-sector bank, shrank its credit card portfolio by half to $1.08bn in March compared with the same month in 2008.

The losses were largely attributed to the availability of easy consumer finance without promoting financial literacy among Indians.

"More and more people are resorting to debt to finance their consumption needs," the RBI said in a 2008 report on financial literacy.

"Aggressive marketing of personal loans and credit cards to a vulnerable section of borrowers could also have consequences of over-indebtedness and rising non-performing assets."

Last year, complaints by harassed credit card customers involving problems of excessive billing, threatening calls by recovery agents hired by banks and the issuance of unsolicited cards shot up considerably.

The banking ombudsman, a body appointed by the RBI to look into such cases, says it received 181,810 such complaints last year, an increase of 80 per cent over the previous year.

It says that it is investigating all those cases and that appropriate action against banks will be taken.