Stung by rising non-performing assets (15 per cent in some cases), several banks have now started issuing cards linked to fixed deposits (FDs).
ICICI Bank, the biggest credit card issuer, has made it conditional for some of the credit card applicants, who do not meet the bank’s eligibility criteria, to open FDs under a scheme called Fixed Deposit Instant Credit Card.
Axis Bank has also launched such a scheme. Other banks said this product was a part of their offering, but they were not pushing it aggressively. Neither bank wanted to comment on the issue.
Ravi Subramanian, head of cards at HSBC, said this product not only secures the lending, but also allows banks to issue a credit card to a person who is otherwise not eligible.
In this scheme, banks ask applicants to open an FD account with an auto-renewal facility. The minimum amount is Rs 20,000 and the maximum Rs 3 lakh. The credit limit on the card is pegged at 85 per cent of the FD amount.
The bank then marks a lien on the entire fixed deposit amount. This means the depositor cannot break the FD as long as he holds the card. Only the interest can be withdrawn.
If the cardholder fails to pay the outstanding amount on the credit card within 90 days from the date of the statement, the bank has the right to liquidate the FD and set off the credit card charges against it.
Some banks, however, felt such a scheme did not make sense since most customers were uncomfortable paying around 50 per cent interest on cards and receiving 8 to 9 per cent on fixed deposits.
The head of credit cards at a foreign bank said customers would prefer using the overdraft facility against FDs instead of paying such high rates on cards. “Many banks are toying with this idea with a view to expanding their credit card base. But it makes sense only for low-end customers,” he said.
It seems Bankers have become lesser wise to learn Credit card dynamics. Firstly, Why should one, at all, go for a Credit Card if one has enough resources for FD? Secondly, why to settle for 75-85% credit limit, blocking 15-25% of one's own funds.
Thirdly, why to pay interest overcharge (FD & Card rate spread) to Card issuer?
Basic concept of Card is just a temporary facility to spend in advance, ahead of regular future income of a well founded person.
Conclusion: When facing UGLY BIGLY NPAs Banks admit their folly of making Cards their prime business, choosing sub-prime debtors.
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