Close up female hand holds levitating template mockup Bank credit card with online service isolated on green background. High quality photo istock photo for BL | Photo Credit: Georgii Boronin
RBIs new directions to protect credit card customers are welcome but the latter need to be aware of issue terms
As a regulator that dons many hats, the Reserve Bank of India is often criticised for focussing too much on its macro objectives, while neglecting its customer protection mandate. But its recent Master Directions, which significantly rewrite the rules for the issue of credit cards, can do much to improve the credit card user experience. Complaints against credit card issuers figure prominently in RBI’s annual Banking Ombudsman reports with the number of such complaints more than trebling from 12,647 in FY18 to 40,271 in FY21. Unsolicited card issues, being billed for undelivered cards, wrong reporting of defaults to credit bureaus, levy of excessive charges and interest and strong-arm tactics used by recovery agents are the key grouses aired by customers. The Master Directions address most of these issues.
Banks’ practise of issuing unsolicited cards and upgrades without customers requesting them, is a key source of fraud with such cards misused before reaching the customer. The new directions plug this gap by requiring the customer’s explicit written consent for a new card or upgrade, with OTP authentication required for activation. Acquiring a credit card is often far easier than surrendering one, with unused cards prone to accumulate penal charges without one’s knowledge. RBI has cut this risk by requiring issuers to deactivate cards within seven days of a customer’s request and to initiate closure if a card is unused for a year. The bulk of card mis-selling and identity fraud happens via tele-marketing. RBI has now put the onus of assessing credit-worthiness using customer data solely on the issuing bank, while treating all partners as selling agents. Fintech firms which tie up with banks and use data analytics to issue cards are unhappy with this move, but it is an essential customer protection measure. Many card users land in a debt trap as they are unaware of basic terms and conditions, such as the levy of interest if you pay only minimum dues and the loading of interest when dues are converted to EMIs. They also mistake the monthly rate of interest for annual rates. Card issuers have now been asked to be more transparent by quoting interest in terms of annualised percentage rate, disclosing the interest component in EMIs and sharing important card terms and conditions at multiple points of contact. Welcome as these steps are, they may still not protect card users, if the latter remain lax in reading through documentation.
The directions also try to address the issue of card issuers misreporting delays and defaults to credit bureaus leading to a downgrade in credit scores. Issuers will need to give card users seven-day notice before such reporting. But it is not just defaults on credit card dues that lead to a cut in one’s credit score, but also the use of multiple cards and high credit utilisation. It is also ironical that while issuers use credit scores as a key input to decide on whether one is eligible for a card, they do not offer better interest rates to customers with sound credit scores. RBI should nudge banks towards differential rates and look into the opaque workings of credit bureaus.
Published on May 08, 2022