RBI’s credit card curbs are a classic case of ‘prevention is better than cure’
₹160 trillion, according to data from the Reserve Bank of India (RBI). Credit card debt has risen by 23% to ₹2.5 trillion, which is less than 1% of India’s nominal GDP of about ₹270 trillion for FY23. The numbers for the US paint a worrying picture.
Credit card debt has crossed $1 trillion, or almost 4% of America’s nominal GDP for CY23. The 2008 subprime mortgage crisis involved a similar amount – $ 1.3 trillion – and a credit card debt crisis cannot be ruled out if the current trend continues, despite the greater cushion the US now has because of the growth of its economy since 2008. With the average credit card interest rate rising steadily to more than 20% over the past two years in tandem with the US Federal Reserve hiking interest rates, this debt could end up costing Americans dearly.
Against this backdrop, the RBI’s measures to avoid a similar situation in India are welcome. In November the central bank decided to check the growth of the credit card market by raising the risk weight on banks’ exposure to the segment to 150% from 125%. Simply put, banks now have to set aside more capital for outstanding sums on credit cards.
The regulator further tightened its scrutiny in March by issuing strict guidelines for co-branded credit cards, such as prominently displaying the name of the issuer bank, to prevent unauthorised entry into the tightly regulated segment. It barred Federal Bank and South Indian Bank from issuing fresh co-branded cards. Several fintech companies and non-banking financial companies (NBFCs) have been looking to participate in the lucrative credit card business through co-branded cards with banks as they can earn an upfront activation fee and a portion of interchange fee for the lifetime of the
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