Banks make brisk business from credit cards

Commercial banks have added Rs 159.7 million worth of loans against credit cards in the first eight months of the current fiscal year. The total deft against the security of credit cards as of mid-March stands at Rs 584.6 million, according to Nepal Rastra Bank (NRB). While the overall lending slowed down in recent months amid devastating earthquake and Tarai turmoil, banks have increased their loans against credit cards. NRB data shows lending against credit cards jumped 37.6 percent in the first eight months of Fiscal Year 2015/16, compared to 23.4 percent growth in the corresponding period of the last fiscal year. Banks had floated Rs 96.3 million against the security of credit cards in the first eight months of the last fiscal year. Bankers say that the demand for credit cards have surged in recent time as the middle class employee finds the facility convenient to address cash crunch. According to the central bank, 47,618 credit cards are in circulation at present. Only 'A' class commercial banks are allowed to issue credit cards in Nepal. Bankers estimate that 90 percent of the credit card users borrow the credit limit of Rs 10,000 to Rs 100,000. They say that the loans against credit cards are the source of higher interest income for banks. "One of the main reasons why banks have been giving priority to credit card is that its return is higher," Kishore Maharjan, vice president of Nepal Bankers Association (NBA), said. "Interest rates range from 25 to 30 percent. While consumers may not feel that the interest rates are higher as they get relatively low credit ceiling and pay low monthly interest, the cumulative income this credit portfolio brings to a bank is significant." Due to excess liquidity in the banking system, interest rates of banks have fallen to as low as 6 percent. Nepali banks offer 45 days of due period. This means credit card users can use their credit limit without any interest charge for 45 days. The rise in lending against credit cards, despite relatively high rates, shows growing attraction of people toward credit cards. Many bankers think that Nepal's debit culture is now shifting toward the credit culture, albeit slowly. "There are many benefits of using credit cards. The Nepali market is also realizing these benefits. One doesn't need to worry even they run out of money if they have credit card," Bikram Shrestha, head of e-Banking and Information and Security Department of Sanima Bank. Sanima Bank is introducing credit card service for its clients within three months, according to Shrestha. According to Maharjan, banks issue credit limit based on either the salary certificate or the balance sheet of their clients. "Generally, banks offer credit limit equal or one and half times the monthly salary of the credit card user. Similarly, it floats loans of up to around Rs 100,000 based on the balance sheet," he added. There, however, are higher default risks for banks while issuing credit cards. "Banks issue credit card based on employer's salary certificate and the credit becomes risky as such borrower might leave the company where s/he is employed and go out of contact. However, such risk is less from the users whom banks issue credit card based on their business or balance sheet as such clients do not jeopardize their reputation for the sake of few hundred thousands of rupees," added Maharjan. Source: Republica