Private banks increase interest on credit cards

They are kept high as the scope of delinquency in this business is more

Private banks have started increasing interest rates on credit cards. Credit cardholders pay this interest, commonly called finance charge, on a monthly basis on the outstanding amount in case they do not repay their overall dues within the interest-free period.

Kotak Mahindra Bank has decided to increase the monthly interest on its credit cards by 10 basis points (bps). “We wish to inform you with effect from January 1, 2014, the interest rate on your Kotak credit card will be changed from 3.3 per cent to 3.4 per cent a month,” the private lender informed its credit card customers through emails.

HDFC Bank, the largest credit card issuer in the country, has also raised finance charges on its credit cards. Now, it will charge a monthly interest of 3.25 per cent across all its cards, excluding the super-premium ones. Earlier, the bank charged interest of 3.05 per cent, 3.15 per cent and 3.25 per cent a month, depending on card types.

Bankers say credit card interest rates are kept high as there is more scope of delinquency in this business. The rate revision wasn’t dependent on banks’ cost of funds, but on the risk perception, they added. “Generally, credit card rates are so high that even a 100-bps increase in the cost of funds does not have any material impact. The interest rates on credit cards depend on risk perception. Given the uncertain economic environment, the risk of default has increased. This prompted some banks to increase their rates,” said a senior banker in charge of the retail banking business at a foreign bank.

Though he said his bank hadn’t revised its credit card interest rate in the recent past, he didn’t rule out such a rise in the near future.