Interest rate shocker for Lankan credit cardholders
Sri Lankan credit card holders numbering over 1.3 million have been shocked and dismayed by the sudden interest rate hike by several commercial banks this week following the Central Bank’s directive to lift the cap on credit card interest rates.
The Central Bank (CB) also instructed commercial banks to charge competitive interest rates with effect from June 26 causing a ripple effect on credit card customers who have always paid minimum monthly payment on time instead of settling the whole debt due to financial hardships.
The number of active credit cards in the country by April this year was 1.354,971 and the total dues of card holders to be paid to commercial banks was Rs.78,797 million, CB data showed.
The CB, from time to time, imposed maximum rate caps to control banks charging high-interest rates and to encourage borrowers. Currently, credit card maximum cap stands at 24 per cent, housing loan cap stands at 16 per cent and overdraft interest rate stands at 24 per cent.
However, under the “Circular No. 2 of 2017 – Interest Rates on Credit Products,” banks can fix the rates at their own discretion and tariff structure (it’s limited to few loan products only), also banks have the freedom to set the penal interest as per their cost structure. This circular comes into effect from July 1, 2017.
Banks are instructed to publish the interest rates when promoting credit products in any media; also they have to publish the penal interest rate, the method of computation and changes in interest rates. “I have been trying to pay them off, but it gets more difficult as my monthly income is not sufficient to settle credit card dues going up and up,” a junior executive of a mercantile firm told the Business Times.
‘The sudden credit card interest rate increase to 28 per cent from 24 per cent is unbearable for persons like me as I am compelled to manage with the cost of basic necessities of life,” he added. Late payment charges, high interest and interest calculation systems are the main complaints from customers.
The Government also charges stamp duty on credit card payments and it too adds a significant cost on card users.Ms.Sumana Perera, an assistant accountant of a state corporation, said the interest charge on her credit card from a reputed bank was unfair. “I had Rs.20,500 due and paid Rs.20,000 but the bank had charged interest for the whole amount of Rs.20,500. Late payment charges too are extremely high,” she said.
However, CB Governor Dr Indrajit Coomaraswamy said the lifting of the cap on interest rates on credit cards is aimed at allowing commercial banks to charge a competitive interest rate discouraging unproductive short term personal loans.Such personal loans have increased during the recent past, he said, adding that it was being used for consumption and it has not brought any economic benefits.
‘The total credit card debt is 3 to 4 percent of GDP, which is a very high figure,” he pointed out. Deputy Governor Dr. Nandalal Weerasinghe noted that credit cardholders will not have to pay interest if they make payment during the grace period given by banks. Otherwise they will fall into a debt trap, he said.
Credit card purchases are interest-free for a number of days only (days may vary depends on the provider), after the credit period cardholders will be charged an interest and a fee for late payments. They will have to either pay off purchases in full before the grace period ends and avoid taking on interest.
However Dr. Weerasinghe pointed out that risk for the banks due to increase in credit card transactions was very high and that is why the CB decided to remove the cap on credit card interest rates. He noted that 28 per cent interest was not very high compared to market rates. When the market rate was 6 per cent, then the interest rate was 24 per cent. Now the market rate is 12 per cent and the interest is 28 per cent, he said adding that the increase was only 4 per cent whereas it should be 48 per cent.
On the other hand cardholders are aware on the high interest rates of credit cards and they should use it wisely without falling into a debt trap, he pointed out. Commercial banks could introduce competitive interest rate but it should minimise credit card defaults preventing higher-than-usual losses, he added.
A credit card is issued usually completely free of security of guarantors and is a high risk credit instrument from the bank’s perspective and the applicable interest rates are therefore higher than for secured credit facilities, he emphasised. He said that by and large the fee and cost structure of the card business across the world remain the same.
The interest rates on credit cards cannot be lowered on par with housing loans. This is since if needed the cardholder could use the credit card for any transaction without any interest for 45 days, a leading banker who wished to remain anonymous told the Business Times.There is no interest payable if the amount is repaid within 45 days. Hence, the banks earn a higher turnover from credit cards. Due to this, in any country the interest rates charged on credit cards are higher than housing or other loans.
A credit card is a form of borrowing; most of the banks want customers to service only the minimum commitment so they can earn the interest; beware of this trap, he said adding that servicing only the minimum commitment will pile up interest and cardholders will be in lifelong debt. He said with the interest rate on housing loans at 16 per cent, the banks could charge around 28 per cent on credit cards.
He expressed the belief that since several banks are providing credit cards at 24 per cent interest or less than that at present the banks which will charge higher rates of 28 per cent would be forced to reduce their charges in the near future. Otherwise, the credit card business of these banks could suffer a setback, he added.