Review cap on credit card interest
About 70 percent of credit card-users pay off their loans before incurring any interest, leaving banks to rely on the remainder to make profits, said bankers.
The Association of Bankers Bangladesh (ABB), a forum of banks' chief executives, explained this in a letter to the central bank recently, after Bangladesh Bank's move to cap credit card interest rates.
The proposed 5 percent cap on interest rate of consumer loans will take a toll on earnings, as the cost of fund for the rest 70 percent users has to be included into the pricing of the 30 percent, it said. The ABB also pointed out four major new provisions, which require the central bank's urgent review.
In the guideline, the central bank said credit cards in taka can be issued by any scheduled commercial bank in Bangladesh, and the card in foreign currency is to be issued by authorised dealer banks only.
Here, the ABB proposed inclusion of non-bank financial institutions as the credit card issuing authority as well.
Interest on consumer credit now stands at 11 to 12 percent, which means the cap would bring down the interest on the payment tool to 16-17 percent from the existing highest rate of 36 percent, it said.
The reason for such high rate is most issuing banks offer 45-50 days interest-free period to cardholders, the association said.
Though, cardholders do not incur any interest for the period, the issuing bank has to absorb the cost of fund for these days, it said.
“The current range of interest rate is charged to cover the high operating and servicing costs of the business, as well as the numerous value-added features and benefits offered to encourage customers to use the product.”
If the annualised rate is revised to the proposed 5 percent cap, the probable new annualised rate will be around 20 percent.
“That means, with the present consumer behaviour—the customer will be paying around 10 percent of interest. If banks deduct the cost of fund, provisioning requirement, credit loss and management expenses—the product will be non-viable commercially.”
Moreover, cardholders expect different lifestyle perks and benefits like complimentary dining, travel, rewards and lounge facilities as part of the card offer. Banks do not charge for these benefits; rather they cover the costs from the revenue, said the ABB.
“With the revised interest rate framework, such customer benefits will be difficult to provide. As a result, credit card as a product will lose customer attraction.”
Till date, the major acquiring banks have deployed more than 30,000 points of sale (POS) machines at about 20,000 merchant outlets, according to the association.
Each machine costs banks Tk 22,000 on average, and additionally a significant monthly cost is incurred to maintain, repair and replace these POS machines, and for payment of SIM usage costs to the telecom companies, it said.
Moreover, the operating costs for credit cards are materially higher than any other banking product, as the banks need to invest significantly in plastic cards and their production, promotional and other corresponding materials.
“As a result, the average cost-income ratio for this product could hover around 75 percent.”
On the restrictions on the promotion of credit cards, the ABB said most of the major banks around the world have been actively promoting and encouraging cashless transactions.
The growth of cards and their usage will come to a halt if such promotions are stopped, the association said.
The main issue objected by the bankers is the 5 percent cap, said a senior executive of the central bank.
The ABB may sit with BB Governor Fazle Kabir to discuss the issue this week, the official added.