Comment – Credit cards: The slow killer
View(s):Two weeks ago, a customer received a call from a reputed Sri Lankan foreign bank. Confused at first, because it was a call that had a ‘recorded message’ which could not be understood, the customer ignored it, when to his dismay it came again for the second time a few days later giving the customer another telephone number that he should call.
While there was no other message of explanation as to why the customer should call this number (which should be a basic courtesy from a bank towards its customers), it was also simply impossible to take down a seven-digit number rattled off in a jiffy. A few days later, the customer received the same call and by the time he wrote the first three digits of the number, the call ended. Further enquiry from the bank concerned, revealed that he was over the maximum limit permitted in his credit card.
Earlier this bank (and other banks too) had a group of outsourced-representatives calling cardholders and informing them that spending has gone over the limit. Sometimes, calls are received at the individual’s office, and if he or she is not in, the person taking the call is told to inform the cardholder that ‘he has exceeded the limit’. So much for confidentiality!
Then there is a tale of a corporate lawyer who went to the bank to verify his credit card balance and was told bluntly to access the bank website! Only after creating a commotion at the counter that the bank manager came running to attend to his requirement.
The point of these stories is to show that the use of the credit card has become so widespread that banks are forced to use new technology to keep track of spending limits and payments. While the banks are minting money through the seemingly-innocent ‘you-need-to-pay-only-a-small-fee-monthly’ rule – which in essence means your interest mounts and settling the full payment is a huge problem, the middle-class and the class slightly lower than that, are getting more and more mired in debt and trapped in a vicious circle of temptation — buying accompanied by the debt trap.
As reported in the Business Times last week, the number of active credit cards in the country as at April this year was 1.35 million, while the total amount the card-holders owed to commercial banks was Rs.78,797 million (Rs. 78.7 billion). While the numbers imply one out of every 20 persons in Sri Lanka has a credit card, it also reveals that each card-holder on average is in debt to the bank through the credit card alone at an astounding Rs.581,540 (more than half a million rupees).
Effective last week, interest rates on credit card payments have been increased to 28 per cent from 26 per cent earlier, triggering widespread concern from users as the Business Times reported last week.
While the concept of the credit card was originally meant to serve as a convenient mode of payment for purchases without carrying cash, it is now used to pay for purchases even without money in the bank. Many card-holders have two to three different cards and when one card is ‘refused’ after reaching the maximum spending limit, a second or third card is used.
In today’s consumption-led economy, the focus is on buying rather than spending within earned cash limits. There are a number of card-holders who also have a debit card (which limits spending to your bank balance) but often use the credit card when the debit card limit is reached.
So are Sri Lankans living beyond their means or according to an old phrase “not cutting the coat according to the cloth”?
While the individual is to blame for spending beyond one’s earning capacity, the banks too are culpable running enticing advertisements on card benefits and, unlike before, reducing paper work and payment firewalls. Limits are increased even without requests to card-holders. Unbelievable offers particularly zero-interest on the purchase of white goods (washing machines, refrigerators, electronic goods and furniture) and hotel stays sometimes with as much as 50 per cent discounts by large retails firms or hotels have seen locals splurge on items or holidays they don’t actually need or should have taken.
On paper, while it seems so and the debt is multiplied by Sri Lankans who have multiple cards compared to single-card owners, further examination of buying trends reveals a different picture: Middle-class consumers are using the card for basic essentials – vegetables, meat or milk and not luxury items.
If this is the case, then cards are being used to borrow cash (that is not within the reach of the card user and will never be) basically to fund the family budget and just essential purchases. While more detailed information would be available in an upcoming Business Times-Research Consultancy Bureau (BT-RCB) poll on credit card trends, these initial spending-spree signs are not good and unhealthy to the economy where people are now borrowing to pay debt (just like the government’s bond issue schedule).
In an effort to put a cap on spending, the Central Bank has relaxed rules on interest rates allowing banks this discretion in the hope that by increasing interest rates, Sri Lankans will reduce card usage.
The authorities have also asked banks to be more transparent in promoting credit products and (this is important), the basis of computation of the penal interest rates that should be carried in the bank’s website for the information of the public updated regularly to reflect the current rates.
Furthermore, the Central Bank has instructed commercial banks that in computing the penal interest, “the penal interest, if any, shall be charged only for the amount in arrears during the overdue period”.
One of the problems card users have is that the banks charge interest on the entire amount, even if part of that has been settled prior to the due date. While card-holders have many issues with banks pertaining to penal interest and verifying bank details (no one wants to be kept on hold or answering a faceless bank telephone operator), banks should be directed — just like the compulsory ‘danger to your health’ warnings on cigarette packs – to carry similar ‘spend at your peril’ messages. Otherwise, like that pithy Sinhala saying, “We’ll be going down the pallang very soon”.
The health of a nation is judged not only by disciplined spending from the Government but also by its people. In both cases, Sri Lanka is falling short and very soon residents – just like how Thai investors jumped out of high-rise apartments after the stock market crashed — might find themselves in a similar precarious position with the number of apartments springing up in the city, also purchased from borrowed cash! The deck of (credit) cards it seems is stacked heavily against Sri Lankan citizens.