India's Murderous Credit Cards

The Government and RBI are playing second fiddle to the big fraud perpetrated by India's banks. Over 16,000 Indians who committed suicide between 2018-20 said rising debt was the main reason for their deaths.

India has more than 100 million credit cards in circulation for its 1.4 billion population. That is small compared to the standards of developed countries. The combined debt on credit cards amounts to almost INR 2.1 lakh crores. In 2023, 1.6 crore new credit cards were issued in India. Approximately 2% of India's Gross Domestic Product is accounted for by these cards on a quarterly basis. That might not be a big number.

The issue arises when you become aware that this money is being loaned without collateral, particularly under unregulated circumstances. The interest rate on credit card balances is about 50% annually, compounded monthly. Banks impose arbitrary financing fees and credit charges on the outstanding amount, resulting in an annual borrowing cost of approximately 80-85%. In Singapore, the maximum interest rate on credit card debt is approximately 15% (according to Forbes, which globally reports it as around 27%).

The US leads the world in median credit card debt with US$ 5915 outstanding on every card. But what sets the US apart is the ease with which citizens can access other forms of debt and offset high cost debt. The market is also well regulated.

The Indian banks resemble Shylock from Shakespeare's Merchant of Venice.

Young Indians are caught in a veritable debt trap. Credit cards have been kept out of the ambit of regulators by the government. As a result, banks use unscrupulous methods to collect their outstanding bills. Customers are threatened by goons, they are harassed and humiliated in public if they fail to pay. Many young people are forced to commit suicide every year.

What does this actually do to India’s economy?

Indians are paying an average of 3-5% per month on the INR 210,000 crore outstanding on their credit cards to India’s banks. That is an estimated INR 10,500 crores in interest and financial charges. Banks grossly underreport this number because they are not required to divulge this information to the RBI. Most of these transactions are also booked in the name of ‘arms-length entities’ by the banks. These actions have wide-reaching consequences to India’s economy.

Diminishing the purchase capacity of youth

Young India’s entering the workforce are the powerhouse of India’s growing consumer market-led economy. Banks extend credit cards with salary accounts to these youngsters, who have no experience managing debt. Online shops woo them with discounts and buy-now-pay-later schemes, and they are left saddled with high-cost debt. The cost of servicing the debt robs them of their real purchasing power.

Diminishing GDP growth

Young people have received a significant portion of India's 100 million credit cards. They are saddled with high-cost debt on their credit cards. They should have transformed the economy by investing in properties and the stock market, buying insurance for their families, or availing of auto loans if the banks had not been taking away a large part of their income. The opportunity costs of this bank-sponsored income heist is huge and seriously damage India’s GDP growth.

Unchecked use of violent recovery methods

Banks use arm twisting methods like public humiliation and harassment by goons to get their money back. There are currently no regulations governing these practices. The collection agents bribe the police who are often hand-in-glove in these practices. Between 2018 and 2020, over 16,000 Indians committed suicide due to debt. These were numbers in a normal year and do not reflect the covid-induced stress in finances. Those numbers should have been larger.

People lose faith in the banking system

Any country with a rules-based society should avoid the opportunistic practices of its banks. Such practice widely dents people’s confidence in the rule of law. The government has evidently left massive grey holes in the legal system on purpose. India issues over 16 million new cards annually. Therefore, it affects a growing number of people every year too.

A well-drafted guideline for issuing and managing credit cards is the need of the hour. Banks should also be forced to file monthly reports on credit card fraud and collection practices. Banks also charge arbitrary fees on transactions, and such practices need to be curbed with immediate effect. No self-respecting country should permit opportunist Shylocks to harvest a pound of flesh from their youngsters. Such an industry will only prove to be self-defeating in the long run.

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