Rising debt-trap

Credit card holders' collective liability to banks has soared to nearly 60,000 crore by the end of this September, a whop  ping 39 per cent jump in a year. Indeed, it is one of the side effects of demonetisation that was unleashed a year ago. Banks, particularly private ones, took advantage of this cash squeeze to boost credit card use; selling over 60 lakh credit cards in just one year. First time users of the plastic cards were thrilled by the new found power of nearly-unlimited purchase, unaware of its potential to land them in a debt-trap. They did not realise the ease of purchase had an attached cost - exorbitant interest rates of 40 per cent or more with the interest calculated on an average daily balance method. Banks justify the usurious interest rates in order to neutralise the impact of payment defaults. Thus, a credit card may well become an instrument non-performing asset (NPAs) for banks and debt-traps for customers. 

The credit card is one of the innovative and modern payment options. It is not an evil per se provided one knows how to uses it. A credit card comes in handy in cases of emergencies such as hospitalization or emergency travel. The smart user avails all its benefits including discounts, complimentary insurance, rewards points and special privileges associated with individual cards. To the frustration of banks, a smart user never allows any outstanding to accumulate. But, the temptation of 'purchase now and pay later' also encourages conspicuous consumption and some cardholders end up spending more on their ability to repay. Thus the debt-trap is created.

Notwithstanding the accumulated arrears, banks aggressively promote their plastic cards. The industry is growing faster especially after last November's demonetisation. It is intriguing; either the banks are sitting on another NPA bomb or they are minting money by charging high interest rates. This is alarming in either case. The card business needs to be properly regulated. Banks require to acquaint consumers unambiguously about every intricate detail associated with the usage of plastic cards. The RBI too should monitor interest rates charged by banks on credit cards.