The central bank yesterday capped the interest rate on credit card loans at 20 percent in a relief for clients as they would get rid of the burden of higher interest amid the pandemic. Banks charge between 25 and 27 per cent interest on credit card loans, way higher than the 9 percent interest rate ceiling applicable for all loan products in Bangladesh.
As per a previous instruction of the central bank, banks were allowed not to impose more than 5 per cent on top of the highest interest rate of a consumer loan for the amount of the outstanding loan of a credit card. The provision helped banks enjoy more than 25 per cent interest against their disbursed loans through credit cards. In April, the central bank had imposed the interest rate ceiling of 9 per cent for all loan products except the credit cards.
Had the Bangladesh Bank followed the previous provision, lenders would not be permitted to levy a maximum of 14 per cent interest on credit cards, a central bank official said. “The latest ceiling on the interest rates will give a relief to clients,” he said.
The central bank also found some irregularities committed by banks, which are impairing the interest of cardholders. The Guidelines on Credit Operations of Banks issued in May 2017 stipulated that a client is allowed to withdraw a maximum 50 per cent in the form of cash against their credit card limit set by banks.
But lenders have disbursed loans in many forms ignoring the ceiling, thus widening the credit risk for banks, according to a central bank notice yesterday. Loan disbursement through credit cards is highly unsecured and collateral-free, so banks should take extra cautionary measures while giving funds by way of using the tool, the BB said.
Besides, clients have to pay a higher interest rate against loans, which is harming the interest of the customers. The central bank yesterday instructed lenders to follow the 50 per cent cash withdrawal ceiling. Some lenders also impose interest rate against the overdue loans of clients from the beginning of disbursement in another violation of the guidelines. Interest can be charged when the loan becomes overdue, the BB said.
In some cases, banks impose late payment fees several times against the defaulted clients, contradicting the guidelines. Lenders have been asked to realise the late payment fee for just once. The new directives would be effective from October 1.
Speaking to The Daily Star, heads of the card at three banks expressed frustration at the central bank’s initiative, arguing that this will not bring any good for the country’s credit card market. The credit card operation of banks is highly costly. Besides, a large number of employees has been recruited to run the operations.
Banks have to offer various discounts, buy-one-get-one offers and lounge facilities at airports to attract and retain customers. So, their cost of operation is high in this business. So, the latest instructions will create an impediment to offering such discounts as profits from the credit card operations will be on the decline in the coming days, they said.
The bankers say the central bank had excluded credit card from the 9 per cent interest rate ceiling and it was a good thing for the growing credit card market. Banks’ profit has already faced different challenges because of the ongoing financial meltdown and the 9 per cent interest rate cap.
“The latest initiative will give another blow to the income of banks,” said one of them. “20 per cent interest rate is not sustainable for any bank,” said an official of a payment-processing company. The interest rate on credit card loans is high across the world and it goes up to as high as 35 per cent in some countries, the executive said.
“So, if the interest rate goes down, banks’ incomes would go down. As a result, banks would not be able to continue offering the same benefits to customers as they are giving now. This means customers also would not benefit from the interest rate cut.” But the central bank official differed, saying clients are now reluctant to use credit cards because of a fall in purchasing power in the wake of ongoing the economic recession.
So, the latest rate cut will encourage them to embrace the product that will surely give a boost to the credit card market, he said. In India, some banks charge as high as 47 per cent annualised interest rate on credit card loans, reported Indian business news website Moneycontrol in February.
The median credit card interest rate for all credit cards in the Investopedia database currently stands at 19.49 per cent, based on average advertised rates across several hundred of the most popular card offers in the US.
In July, credit cardholders spent Tk 1,252.4 crore in Bangladesh, the highest in six months and up 19.49 per cent year-on-year. Their spending stood at Tk 898 crore in June this year and Tk 1,048.1 crore in July last year, BB data showed.
The number of credit cards in circulation stood at 1,597,748 in July, up 10.56 per cent compared to 1,445,119 in the same month last year. The number stood at 1,593,697 in June this year. In Bangladesh, credit cards were launched in 1997, by Standard Chartered bank. The credit card segment is dominated by City Bank, Eastern Bank, Standard Chartered and Brac Bank. Lanka-Bangla Finance dominates the domestic-only credit cards.