Consumers who do not benefit from low interest rates

KARACHI: Consumers are missing out on the benefits of low interest rates because banks still charge a high margin on personal loans and credit cards, analysts said Thursday.

The State Bank of Pakistan has cut the policy rate by 6.25 percentage points to 7% since March last year to deal with the economic slowdown induced by COVID-19.

Wider impacts of central bank rate cuts are being felt throughout the economy and among borrowers. However, this has no positive implications for people using credit cards, analysts said.

Banks charge up to 42% annual interest rate on various categories of credit cards, with fees on this financial product ranging from Rs2,000 to Rs15,000.

Many consumers rely on this unsecured loan which is not asset backed and generally more expensive to take out.

Credit cards are a good source for dealing with small daily expenses. They provide convenience and protection to users. Some cards may have rewards or other incentives to attract consumers to credit cards.

The total number of payment cards stood at 44.28 million in the second quarter (October-December) of this fiscal year, followed by debit cards with 27.59 million and credit cards with 1.69 million. users.

E-commerce merchants processed 2.8 million credit card transactions worth Rs 16.4 billion in October-December FY2021, compared to Rs.23 million worth Rs 13.3 billion in the same quarter last year.

Outstanding consumer bank loans rose to 665.7 billion rupees at the end of March 2021, compared to 533.9 billion rupees at the end of June 2020. Banks’ (current) lending through credit cards increased to 53 billion rupees at the end of March against 43 billion rupees at the end of June.

The SBP has increased the borrowing limits for credit cards and personal loans to 3 million rupees from 2 million rupees under the own credit limit. The borrowing limit for Preferred Customers has been increased to Rs 7million from Rs 5million through credit cards and personal loans.

Overspending, job losses due to the pandemic, rising interest rates on credit cards, and lack of knowledge about how these cards actually work have put many users in a debt trap. They take another loan to pay off their debts.

Users do not try to keep their account balance within the assigned credit limit to avoid over limit charges. As a result, banks make a lot of money from it.

Executives and experts in the banking industry have declared personal cards and credit cards to be unsecured loans. There is no guarantee that the borrowers will repay the loan to the issuers. Banks therefore also do not have the option of translating this risk into higher interest rates for cardholders.

“This [credit card] is an unsecured business unlike auto loans and mortgages. Its risk premium is high, ”said a consumer banking official.

“The cost associated with setting up payment processing to accept credit cards is also very high, so banks pass that cost on to customers.”

There are few successful banks in the card business in Pakistan. Currently, 11 banks offer credit cards to consumers. Thus, consumers have limited options to choose the best cards according to their needs, he said.

Another banker said the credit card was a clean loan after a personal loan. It gives borrowers a period of 20 days to repay without interest rate.

“The reason for them [credit card interest rates] being high is its worth buying and you can use it whenever you want. In addition to the APR [annual percentage rate] from 32% to 42%, the borrower pays up to 25% interest rate on the installment plans per year, ”he said.

Some banks offer their customers a zero percent mark-up for up to 18 months as part of their installment plans as a reward for customers making their monthly credit payments on time.

The interest rate charged on cash withdrawn from credit cards is generally higher than normal loan rates.

Bankers did not share the current industry trend in the card default rate, but they do remember the number of credit card defaults in 2008. The book on global loans for credit cards fell by nearly 20 to 25%. Many banks have faced consumer credit defaults.

The verification is also very cumbersome before giving credit cards.

The increase in delinquencies could lead to an increase in nonperforming loans for lenders.

About William Rowan

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