New criteria for credit cards as default rate rises

By Bandula Sirimanna

State and private commercial banks are enforcing fresh criteria for new credit card applicants including raising the minimum monthly income level to Rs 30,000 from Rs 10,000 earlier following large scale default and non payment.

Separately some customers told The Sunday Times FT that they have been threatened to repay their outstanding payments or face the threat of property, vehicles and other items being seized by organizations acting as collectors by the banks. HSBC, Standard Chartered Bank and Seylan Bank said they had outsourced the collection process but vehemently denied instructing the collectors to resort to these methods which are illegal. They said no customers have complained on these issues.

In a comprehensive report today, The Sunday Times FT looks at the issue of mounting debt as a result of non payment of credit card advances, an issue which the Central Bank has also raised concerns.

Senior bank officials were of the view that some credit card customers find it difficult to make payments on time owing to high inflation which hit a record high 19.6 percent last month due to the rising cost of goods.

According to a senior Central Bank official, the number of active credit cards has increased to 900,000 and the amount outstanding dues was in the region of Rs 26 billion as of December.

He said the total credit approved is upto Rs 67 billion. The Central Bank had tightened provisions requirements and has been encouraging banks to be more prudent in lending. The government also introduced a punitive tax on credit card transactions.

Some credit card holders who are facing economic hardships have complained that certain banks were using rough tactics and unconventional methods to recover their dues.

They said that some banks have gone to the extent of acting like finance companies and in some cases representatives (outsourcing firms) of such banks had threatened the customers claiming that they could seize their properties and vehicles if they fail to repay the credit card dues. When customers are unable to pay their credit card balances and try to convert it to a loan, the banks, which issued those credit cards with no guarantors, then ask for guarantors. Late charges, over the limit fees, and very high annual charges are other problems with credit cards, it has been revealed.

HSBC
The HSBC Bank, the top credit card issuer in the island with 30 percent market share of over 286,000 cards has raised the bar to qualify for a credit card from a basic monthly income of Rs 10,000 to 15,000 rupees and more recently to Rs 20,000. This will be increased to Rs. 30,000. This was because the lower income group has found it difficult to make repayments owing to financial constraints under the present economic situation. Speaking to The Sunday Times FT, Head of cards and Consumer Assets at HSBC Nilantha Bastian said that currently they are focusing attention on quality customers. Credit cards are fast becoming lifestyle products. Therefore, he said, that ‘the choice of the card you use will express your lifestyle preference. The future will be about customization and what value propositions the bank can deliver to specific card-member requirements.”

He noted that the default rate of card holders has gone up to five percent in the last three months but this was being well managed by the card payment services division of the HSBC. The bank has a computer based scoring system to approve new card issues and sophisticated software allowing it to track and chase after delayed payments.

However, he pointed out that the bank will seek the assistance of third party agents as a last resort to handle credit card defaulters. The HSBC has six authorized collecting agencies and the staff of these outsourced companies has been empowered to persuade the defaulters to make payments due to the bank. Activities of these agencies are being strictly monitored by the bank and any complaints of harassments to customers will be promptly investigated by the HSBC authorities, Bastian said. He disclosed that in some instances the bank has given permission to collecting agents to visit residences of willful defaulters and thereafter legal action will be taken against them as a final resort of recovering the dues. HSBC has tight rules on provisioning of loans which is higher than Sri Lankan requirements. Bastian said that its Sri Lanka portfolio defaults are still lower than other countries overseas. The bank has half the credit card based transaction volume though a lesser share of the outstanding loans. More than seven months into 2007, HSBC has only issued about 35,000 new cards against around 100,000 in 2006, he said.

Standard Chartered
Standard Chartered Bank CEO Clive Haswell told The Sunday Times FT said that they have revised the lending criteria only to exclude any segments that have had a poor repayment history.

The decision is in line with the past performance of the said segments and expecting that they may perform worse in line with the increase in inflation. In fact they have recently launched credit card promotions and have plans for more promotions that encourage card sales and usage, he said. “It’s just that we would not offer this to customer segments that we know would find it difficult to pay back, and we know this from past experience. It is our duty to protect our customers from over extending themselves, so we have to be very prudent in defining the criteria to make sure that our internal rules are adjusted to ensure that customers that borrow have the capacity to repay,” Haswell said. He disclosed that the bank has issued 113,252 credit cards and the default rate is less than two percent as they have a strict assessment system to identify genuine customers. However he admitted that there was an increase in the number of credit card defaulters.

The bank has also outsourced collections to two agencies and they are being strictly monitored by the bank authorities. He added that telephone conversations between these agents and credit card holders are recorded so that the bank can investigate into complaints made by customers with regard to harassment. “Less than 2% of our customers ever get to this stage of defaulting as we have taken measures on a proactive basis to recover the dues. The bank managed to significantly reduce any increase in non performance advances,” he said.

He believes consumer credit is a driver of economic growth. The total market for credit cards in Sri Lanka is approximately Rs 19 billion of which 2.6 billion comes from Standard Chartered Bank, he revealed. “Of the non performing category, half has been recovered through means that are standard procedure in the market place while half of that percentage will unavoidably end up in a cycle of legal action. Less than even 1% ever gets to this stage,” Haswell said. However he noted that credit cards are issued on an unsecured basis with the agreement that the repayment is to be provided on demand. He pointed out that the bank has to take every possible action to recover debts and the credit card advances are no exception. However a period of 90 days will be given to credit card holders to make their repayments. Action will be taken to forward all details of credit card defaulters to the Credit Information Bureau (CRIB) of Sri Lanka before taking legal action against them.

The contract signed by the customer with the bank to obtain the credit card is sufficient to file a case against the defaulter, he said. Haswell disclosed that his bank has a fully automated system to assess the creditworthiness of good-faith applicants and to reward customers who make payments on time. He emphasized that banks must invest more in statistical modeling to predict customer behaviour and to assess good spend versus bad to avoid willful defaulters. He added that the growth rate of the industry has far outpaced the default-rate increase. There are thousands of customers who are very responsible in managing their credit. They benefit immensely by virtue of the convenience, benefits and facilities that credit products offer. “As in any other industry, we are still in a formative stage and have a long way to go in replacing cash with plastic,” he said.

BOC
Deputy General Manager of the Bank of Ceylon C. Samarasinghe said that they are following strict evaluating criteria before issuing a credit card to the customer and thereby minimizing the default rate. He revealed that the BOC has issued only 60,000 credit cards and the number of defaulters is negligible. It has raised the income level up to Rs 35,000 to qualify for a credit card to ensure that customers that borrow have the capacity to repay. The BOC has adopted a points system to assess the credit worthiness of the customer before issuing him with a credit card. The bank has entered into credit card business in 1988 as one of the pioneers of the industry and since then they have been experiencing a less than one percent default rate due to its strict monitoring system. Samarasinghe asserted that as a state-owned bank the BOC will never use unconventional methods to recover debts. The BOC will grant six months time to customers to repay their debts. The bank will go before the mediation board and then to courts as a final resort to recover their non performing advances. The credit card customers have entered into a loan contract with the bank and it is sufficient to take legal action against willful defaulters, Samarasinghe said. He was of the view that the quality of life of Sri Lankans has to be improved for the credit card market to grow.” The confidence and optimism of the population have a direct impact on credit. If you look at countries like the US, about 90 per cent of consumer spending is on credit. But to get there, you also need to have the support and facilitation of other service infrastructure. Any credit product requires confidence on the part of the borrower, and a belief in and anticipation of better earnings in the future,” he said.

Sampath
A senior official of Sampath Bank said that there is an increase in the non performing advances and the default rate in credit card transactions as a result of the present economic situation in the country. But the bank has not tightened credit card lending in the face of a spike in defaults, she said. “When inflation picks up and expenses go up people find it difficult to meet payments on time,” she added, pointing out however that the bank has not raised the income level of Rs 15,000 for the eligibility of a credit card as they want to serve low, middle and high income earners, alike. Sampath Bank has taken measures to tackle and recover the non performing advances using a closer monitoring system. She disclosed that there are a few cases of keeping collateral of the credit card holder to enable the bank to recover its advances given to them.

A senior manager of the People's Bank told The Sunday Times FT that they offer a competitive low interest rate on credit cards. He said that they take every possible measure to manage the credit card business through a strict evaluation process before issuing a credit card to a customer as the bank is responsible to the people. He said that their recoverable rates are manageable. He noted that the bank advices its customers to settle the bills before the end of the interest free period as it is unnecessary to pay interest to meet one's everyday expenses. By paying more than the required minimum payment one can avoid mounting credit card balances. However he added that the bank has not resorted to any unconventional methods to force defaulters to pay their dues. He disclosed that the bank will report details of defaulters to the CRIB which presently has 82 member institutions that include all registered financial institutions. Presently the coverage is restricted to advances and credit card facilities over a certain threshold, but contains some positive information such as details of loan repayment, he said.
Seylan Bank, the largest Visa card issuer in the island, follows a strict procedure in the recovery of outstanding amounts from their credit card holders. A senior official of the bank said they have wide experience in handling willful defaulters as their management is also successfully operating a finance company network countrywide. Therefore there was no need to outsource the debt collection process, he said. He disclosed that the credit default rate was very low compared to other banks. Apart from the usage of credit card that give greater purchase power or the credit limit agreed upon, the bank has offered customers various schemes such as special grants where they reimburse a certain percentage of surgical and wedding reception bills and school fees.

HNB
When contacted by The Sunday Times FT, a senior manager of the Hatton National Bank said that although there was an increase in the number of defaulters during the last few months they have been able to manage the credit card lending through a fairly modern credit risk assessment and management system. Poor credit risk management is by far the most serious problem faced by domestic banks, he said. He asserted that the bank has consistently pursued a policy of prudent lending under declared guidelines on credit cards. “We are not deviating from this policy as we know that they will not jeopardise the finances of the applicants but we do not permit a facility if we assess that the applicant will get into a debt cycle which he cannot service comfortably,” he said He noted that their recovery efforts are directed towards ensuring that non settlement doesn’t go into arrears. “We have had very good results on this front and have a very good recovery ratio. HNB has issued well over 100,000 cards.

The bank has not been aggressive on new cards in 2007 due to the current economic outlook. We have concentrated more on card usage than issuing new cards,” he said. The bank which has 150 branches and two million customers, is also bundling its insurance business with banking services and plans to sell more credit cards, he said.

Sri Lanka's initial steps towards a cashless society began in the early 1980's with the introduction of the 'Golden Key' credit card. Its usage was initially small due to the limited recognition of the card, difficulties in convincing customers and merchants of the benefits of using plastic money and also the lack of awareness. Commercial banks began issuing credit cards in the 1980s, along with the introduction of a range of new financial instruments. These were initially limited to local transactions.