Last June, the Reserve Bank of India (RBI) had taken up the sticky issue of consumers holding multiple credit cards and proposed enforcing an overall spending limit across all their cards. The card industry is shining in the limelight on this subject again by seeking further clarification on the proposal. | |
| Credit cards, having found their niche in millions of wallets in the country, are fast assuming significance in determining the money circulation and liquidity in the economy. Imposing an overall limit per consumer can help maintain the liquidity in the economy in sync with the income and purchasing power of people. |
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| However, the process of determining consumers' spending budgets based on their economic, demographic and liability profile entails a precarious balance, a shade like walking a tight-rope in a typhoon. A nominal amount will be of minimal utility and may not be worth the effort involved in implementation. A stringent amount has serious repercussions for card issuers and consumers as well as policymakers. |
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| The process of setting the spending limit is a self-adjusting one, which evolves with time as consumers learn the ropes of plastic money and card issuers comprehend customers' credit behaviour. A policy intervention which directly caps the customer's credit-lines could lead to overregulation and skew that development process. |
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| Also, credit cards draw out unrecorded and unreported transactions into the open and enhance the transparency in the economy. An overall spending limit would curtail this process and undo the gains made so far by driving out transactions outside the radar screen. This could prove a significant issue since the government is now taxing cash withdrawals from banks just to establish a trail of money. |
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| A less-intrusive option for managing liquidity in the economy is enabling card issuers to share details of customers' spending limits via consumer credit information reports at the Credit Information Bureau (India) Ltd (CIBIL). This would enable card issuers to make more informed approval and spending limit assignment decisions. |
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| In addition, the RBI has other avenues for managing the liquidity effects of credit card spending: |
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Strictly banning the issuance of unsolicited credit cards which have unwarranted liquidity ramifications.
Evaluating the fairness of interest and other charges that are often central to delinquencies.
Monitoring the health of card issuers' portfolios and identifying trends detrimental to the industry or the economy.
Penalising dubious industry practices, especially in advertising and marketing.
Encouraging consumer credit education to promote financial discipline in the economy. |
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| The credit card industry, despite its tremendous growth, is still in an incipient phase with the card issuers and customers still trying to understand and adjust to each other. It would be prudent to avoid overregulation, which like lack of regulations, has equally severe consequences on the development of the industry and the economy. niranjan.krishnan@gmail.com |
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