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May 7, 2021

Consumers not beneficiaries of low interest rates

KARACHI: Consumers are not getting the benefits of low interest rates as banks still charge high markup on personal loans and credit cards, analysts said on Thursday.

The State Bank of Pakistan cut the key policy rate by 6.25 percentage points to 7 percent since March last year to cope up with the COVID-19-induced economic slowdown.

Broader impacts of the central bank’s rate cuts are being felt across the economy and the borrowers. However, it doesn’t have any positive implications for the people using credit cards, said the analysts.

Banks are charging up to 42 percent annual interest rate on various categories of credit cards with the fee on this financial product ranging from Rs2,000 to Rs15,000.

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

Credit cards are a good source of meeting smaller and everyday expenses. They offer convenience and protection to the users. Some cards may have rewards or other incentives to attract consumers toward credit cards.

Number of total 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.

The e-commerce merchants processed 2.8 million transactions through credit cards amounting to Rs16.4 billion in October-December FY2021, compared with 2.3 million valuing Rs13.3 billion in the same quarter last year.

Bank outstanding loans to the consumers increased to Rs665.7 billion at end of March 2021 from Rs533.9 billion by end-June 2020. The loan (outstanding) by banks through credit cards rose to Rs53 billion by the end of March from Rs43 billion at end-June.

The SBP increased the borrowing limits of credit cards and personal loans to Rs3 million from Rs2 million under the clean credit limit. The borrowing limit for prime customers was enhanced to Rs7 million from Rs5 million through credit cards and personal loans.

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

The users don’t try to keep their account balance within their assigned credit limit to avoid excess over limit charges. As a result, banks earn a lot of money through that.

Banking industry executives and experts said personal and credit cards are unsecured loans. There is no security whether the borrowers will pay the loan back to the issuers. So, banks have no options either to translate this risk into higher interest rates to the cardholders.

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

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

There are few banks, which are successful in the card business in Pakistan. Presently, there are 11 banks offering credit cards to the consumers. So, the consumers have limited options for choosing the best cards according to their needs, he said.

Another banker said the credit card is a clean loan after personal loan. It gives borrowers a 20-day period to pay off without interest rates.

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

Some banks offer their customers zero percent markup of up to 18 months through their installment plans as a reward if the customers make their monthly credit payments on time.

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

Bankers haven’t shared the industry’s current trend of the card delinquency rate, but they recall how many credit cards were defaults in 2008. The book for overall lending for credit cards went down by almost 20-25 percent. Many banks faced default in consumer loans.

The verification is also very heavy before giving credit cards.

The rise in delinquencies could result in higher non-performing loans for lenders.