Credit Card Debt At 9%? Conditions Apply.

IDFC First Bank Ltd. created a flutter recently as it announced that it would offer credit cards with interest rates as low as 9%. The limited nature of the offer, however, means that the lender is unlikely to shake up the credit card market as it seeks to enter a crowded segment.

While launching its offering, IDFC First said interest rates on credit card debt will range between 9% to 36% on an annual basis, based on an individual’s credit behaviour. However, the overdue interest—charged if a customer fails to pay the minimum amount by the payment due date—will still be as high as 48% per annum.

What caught the market’s attention is the 9% interest rate being offered by the lender, which is much lower than the lowest 24% charged by others.

V. Vaidyanathan, chief executive of IDFC First Bank, told BloombergQuint that the offer would help expand the currently underserved credit card market in the country “as customers with high credit scores will find it more viable to bank with us.”

The 9% rate is reserved only for those customers with high credit scores and an existing relationship with the bank.

“Our existing customers will definitely have a greater advantage, as their chances of getting a lower interest rate would be higher compared to the new-to-bank customers,” said Vaidyanathan, without providing any further details on the grading of interest rate based on credit scores and the percentage of existing customers to whom the 9% interest rate will be offered.

For the new to bank customers, the bank will do an initial screening of the applications it receives, mainly based on their credit score, repayment behaviour, delinquency rate and job profile. After the initial screening process, we will internally rate new customers based on certain parameters such as their repayment behaviour with other banks, credit scores and offer them interest rates based on that.

V. Vaidyanathan, CEO, IDFC First Bank

Lower Credit Card Rates: The New Norm?

Even as the rates offered are unique, they may not set an industry standard, as not all banks find it sustainable to charge such low rates in the long run.

“Interest rates are applicable to a smaller segment of card users who don’t pay in full or pay late and are indicative of higher risk. Thus, a risk-based approach to interest rates is better suited, which we follow at Citi,” said Arjun Chowdhry, consumer business manager-global consumer banking at Citi India.

Agreed, Vijay Jasuja, advisor—cards and payments at Punjab National Bank and former chief executive officer at SBI Cards. “Such low interest rates for unsecured personal loans is not a prudent step from the credit standpoint, because at the end of the day a bank covers its losses and delinquencies from the interest income,” Jasuja.

The 9% interest charge on credit card debt is not just the lowest among credit card companies in the country, but also lower than the personal loan interest rates, which usually range anywhere between 10%-22%, depending on the bank and the borrower.

However, the fact that it is only being offered to the highest rated customers also means that it will be used minimally as this category of users doesn’t defer payments often. Also this category of users has a number of other options to get credit.

“For the wider card customers who pay in full (over 80% of their outstanding dues), interest rates have no relevance as they never end up incurring it. Further, clients also have flexibility in choices in various EMI options at lower rates to manage their finances as per their needs,” Chowdhry of Citi India said.

As such, IDFC First Bank’s strategy may be more marketing than an industry-disruptive move.

“While their credit card offering is unique, the strategy being used is the same as any new bank trying to attract more customers. By steeply narrowing its margins on both liabilities and credit front, IDFC First is reducing its capacity to cover for future delinquencies, which is not sustainable for any bank in the long run,” said Jasuja.

Greater Focus On Credit Behavior

While the low rates offered may not prompt other lenders to follow, the “graded interest rates are expected to bring a focused behavioural change among customers”, said Vivek Iyer, who leads the financial services risk advisory practice at Grant Thornton Bharat LLP. This will help in inculcating a robust credit discipline to get better interest rates, he said.

“For the bank, besides being a great product, it is also a great marketing tool to build a quality customer base. The objective here is to encourage people to spend, as what the bank really needs is transaction volumes. And, if the right set of customers can accrue that spend, then even 9% interest rate will give them income on a product, in which they are a late mover,” he added.

Our aim is to build a credit card book of high-quality customers with high credit scores and good repayment track records, said Vaidyanathan.

Within that book, there will be an internal process of grading them based on the kind of relationship they maintain with our bank—on both liabilities or the amount of deposits they keep with us, and on the credit side based on the kind of loans they take and their repayment behaviour. This would help us build a strong credit card book compared to our peers.

V. Vaidyanathan, MD and CEO, IDFC First Bank