Leading credit card companies are busy working out a back-up plan in case the Supreme Court turns down their petition against a consumer court decision to cap the annual interest rate at 30 per cent.
The apex court is expected to deliver its judgment in the matter in a few days. Leading bankers said they would have no option but to impose a steep annual fee in case the court agrees with the consumer court's opinion.
In their rush to grab market share, most banks had waived the annual fee on credit cards. "We will have no option but to impose a hefty fee if there is a cap on the interest rate. In the process, the business itself would become unviable, forcing many of us to withdraw," said a leading banker.
Many banks have already started "upgrading" their customers to platinum or titanium cards with a few freebies in return for an annual fee. But the numbers are still too small and banks have been wary of pushing this hard in fear of losing customers.
Bankers say the credit-card business is not profitable in India due to the high administration costs and the small ticket size of transactions.
"The average ticket size is just Rs 1,500 and the administration costs are too high. Besides, the default rate in this segment is also pretty high. Thus, it doesn't make sense to cap interest rates at 30 per cent," a foreign banker said.
Another banker said high rates also ensure lower mis-selling and raise the entry barrier. But others say banks themselves to blame for this mess. The default rate on credit cards is 8-15 per cent and has been going up mainly due to the practice of issuing free cards.
"Too many credit cards prompted many borrowers to spend beyond their means leading to delinquencies," admitted a banker.
A few weeks ago, a clutch of foreign lenders including Citibank, HSBC, Standard Chartered Bank and American Express Bank had moved the apex court challenging a consumer court's judgement that a bank cannot charge beyond 30 per cent annually on credit cards, even in cases of defaults.
The banks argued that capping of interest rates on credit card payment was contrary to the Reserve Bank of India policy giving banks the freedom to fix rates on non-priority sector personal loans, regardless of the loan size.
The court had given the banks three weeks' time for their explanation and feedback on the high credit card rates, which range from 35 to 50 per cent.
At present, Citibank has over 3.7 million credit-card holders in India.
HSBC, which manages about 2.8 million credit-card accounts here, levies annual fees in the range of Rs 750 to Rs 4,000 according to the category of the card.
ICICI Bank levies annual fees in the range of Rs 1,500 to Rs 25,000 depending on the features of the card. About 50 per cent of the bank's card-holders hold free cards.