Recently, RBI released its annual data on electronic payment transactions in India. The retail electronic payment systems data showed that the downward trend that credit card numbers had started showing from 2008-09 onwards has continued through 2011-12. Total number of outstanding credit cards dropped to 17.65 million by the end of March 2012 from 18.04 million a year ago. This was a 36% drop from the peak of March 08 when credit card numbers rose to 27.55 million. This was a conscious exercise on part of banks to minimize NPA. Most of the banks drastically cut issuing credit cards to those without good credit history. As a result, defaults went down drastically.
“In the last one year, the percentage of cardholders who have not met their payment obligations for more than 90 days has dropped from 2.82% in the fourth quarter of 2010 to 1.62% in Q4 2011,” says this recent report by Moneycontrol. By and large, analysts have interpreted it as a positive trend. As credit cards were denied to those with bad/suspect credit history, the limited number of cards remained with affluent people and professionals. That naturally took up the average spend on the cards. While the overall aggregate spend on credit cards jumped from Rs 57985 crore in March 2008 to Rs 96613 crore (that is a 68% jump), doing a little arithmetic on RBI data shows that during the same time, the average monthly spend increased more than two and half times—from Rs 1754 to Rs 4562.
There are, of course, reasons to cheer up the trends. But here is the stark reality. The total number of credit cards are just 17.65 million in a country of more than one billion people. Accounting for multiple card ownership by individuals—most of the people that I know have at least two active credit cards; I have three—the penetration of credit cards hovers around just a little above 1% of the population.
On the other hand, look at the rise of debit cards. In the same period—March 08 to March 12—when number of credit cards fell by 36%, debit cards grew 172%. At the end of March 2012, there were 278 million debit cards. Not surprising considering most banks today give ATM cards to their account holders which double up as debit cards. But look at the spend data. The 278 million cards accounted for a mere Rs 53423 crores. Simple calculations show that the average monthly spend on them is a mere Rs 136—that is 3% of the average monthly spend on credit cards.
That is not an encouraging figure. Especially when the finance ministry acknowledges that the card payments should be incentivized to arrest black money growth. The white paper on black money tabled in the Parliament by the finance minister Mr Pranab Mukherji was quite unequivocal about that. “Use of banking channels and credit/debit cards should be encouraged, while trade practices such as cheque discounting should be discouraged,” notes the paper. “Payments by debit/credit cards through e-service intermediaries will simplify and encourage payments in these modes and reduce the cash economy,” it further says. Reducing the cash economy is vital for arresting black money.
But so far, banks have not cared to do much for promotion of usage of debit cards. Most users do not even know that they can directly make payments through debit cards. They still rush to the ATM to withdraw cash to pay in a shop. In small towns, many shopkeepers actually encourage that even though they are aware about debit card payment. That is because they save on paying the transaction fees. Yes, banks still charge similar kind of transaction fees that they charge on credit cards.
Of late, RBI has voiced its concern about that. G Padmanabhan, Executive Director, RBI, in charge of payment and settlement systems recently called the practice illogical. “We are saying that the debit card interchange fee should be lower because credit cards get paid after sometime, whereas in debit cards, there is an instantaneous debit into my account. Hence, logically debit cards charges should be lower,” Business Standard reported him as saying, at the launch of RuPay debit cards, promoted by National Payments Corporation of India (NPCI).
There is no participation fee in RuPay for banks and there is aggressive plans by NPCI to take up its market share. If successful, it may actually cut down the transaction cost drastically—something similar to what the National Financial Switch (NFS) has done for ATM transactions. NFS, started by Institute for Development and Research in Banking Technology (IDRBT) is now managed by NPCI.
But that is some time away. Till such time, RBI can well go proactive on promoting use of debit cards, as they provide a risk free way for banks to increase electronic payment. Just asking banks to promote/build awareness on debit cards can go a long way in growing the use of debit cards. Removing artificial blocks like high transaction fees can further accelerate the trend. Any other incentive can only help.
We may well see some concrete action on this front this year, if the government is really serious about minimizing the hold of black money on our economy.