Now, the credit card crunch

Credit card issuers have systematically pushed loans in the past few years, offering cards even to people without clear sources of regular income or defined assets.-BIJOY GHOSH

The new crisis in India is the result of government policies that actively fuelled a debt-driven consumption boom among the middle classes.

FOR those who are getting tired of bad news from the financial world, the best option may be to simply stop listening. Unfortunately, that may no longer be enough as the news will make itself felt anyway.

The implications of the financial market meltdown will increasingly make themselves felt in the real economy through declining demand and associated job losses. And for the middle classes in India, the crunch is likely to come not only through potential adverse effects on real income but also through further financial pain this time in the form of a credit card crunch.

In the United States, where the current global financial crisis originated, it is already clear that the debt-based consumer spending spree that fuelled the previous boom also entailed lots of sub-prime debt and now unviable credit card debt.

Apparently, the major credit card companies (mostly associated with large banks) wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. Total losses now amount to around 7 per cent of outstanding credit card debt.

Things will, of course, only get worse as job losses and economic uncertainty in the U.S. make it more difficult for large numbers of credit card borrowers to keep up with even minimal payments. According to one projection (by the Innovest Strategic Value Advisors), banks will charge off $18.6 billion in delinquent credit card accounts in the first quarter of 2009 and $96 billion in all of 2009. This is more than double the estimated write-off for the current year, and if it does reach this amount, it will certainly cause significant damage to the financial viability of some of the biggest card issuers.

For Citigroup, one of the largest such global companies, the rate of credit card loss already increased to 7.3 per cent in the second quarter of 2008, up from 4.37 per cent in 2007. Significantly, these losses were not confined to the U.S. alone: Mexico, India and Brazil apparently accounted for 74 per cent of the net increase in credit card losses.

In fact, India shows every sign of becoming one of the trouble spots as far as bad credit card debt is concerned. The last two years have seen a huge explosion in credit card debt, a fact that was noted with some concern even in the Reserve Bank of Indias review of monetary developments, which was published in late October. While credit card debt is still a small proportion of total personal loans in the country, it has increased rapidly.

There are more than 30 million credit cards in the country, and the total value of credit card transactions in 2007-08 was around Rs.58,000 crore, a 40 per cent increase over the previous fiscal year. The outstanding credit card debt on August 29 was more than Rs.29,000 crore, a whopping 86 per cent higher than the amount in the previous year and nearly three times the value of two years earlier.

All this is not only relatively new in India, it is also very much the result of financial deregulation and other government policies that actively fuelled a debt-driven consumption boom among the middle classes. This, in turn, was largely responsible for the high gross domestic product (GDP) growth rates, which were proudly presented as examples of the Indian economys new-found strength.

Credit card issuers in India have already set aside a larger provision for bad loans, at 10 per cent compared with around 4-5 per cent in the U.S. and other developed economies. This in turn raised the cost of borrowing through this method, which is why most card companies in India charge usurious rates of interest varying between 36 and 45 per cent, not very different from the village moneylender.

But even these large provisions for bad debt are proving to be inadequate in the face of growing evidence of the borrowers inability to repay. This reflects the loan-pushing that these credit card issuers have systematically indulged in for the past few years, actively offering cards even to those without clear sources of regular income or defined assets, in our own little version of sub-prime lending.

These practices are now coming home to roost, as major credit card-issuing banks are forced to take into account actual and potential losses. The largest credit card issuer, ICICI Bank, a private institution, has shown flat profits and significantly enhanced loan loss provisions.

The second largest credit card issuer, the State Bank of Indias SBI Cards, posted net losses in the past two quarters. On December 31, 2007, its non-performing assets, or credit card debt that could not be collected by the company, stood at 16.28 per cent. This is likely to have grown since then.

As these problems mount, credit card companies in India are likely to increase interest rates, late fees and other charges in an effort to make creditworthy customers pay for the defaulters. This will in turn put more pressure on such borrowers, who will find it harder to repay, and the problem can spiral just as it has already begun to spiral in the U.S.

In fact, these are much more than straws in the wind as the weather has already changed and many middle-class debtors are caught unawares. Tragedies related to excessive and unrepayable personal debt have already begun to surface. In Mumbai, a family of four adults committed suicide as they were unable to repay the debts that they had accumulated on their 72 credit cards.

Bollywood, increasingly aware of the times, has among its new releases a film entitled EMI, which tracks the misfortunes of various middle-class people caught up in this vicious cycle of personal debt, either lured by advertisements and their own individual greed or simply through ignorance of the full nature and implications of such debts.

But in the words of Sanjay Dutt, who plays a debt collector in the film, liya hai to chukana hoga if you have taken something (or gained) you will have to pay for it. If only that were as true of those who have presided over the deregulation that has allowed all this to happen in this irresponsible way.