CUT TO FIT Banks reduce credit card limits ICICI Withdraws Cash Facility In Some Cases As Creditworthiness Shrinks

New Delhi: S Sinha, an ICICI Bank customer, was shocked on Friday when he received an SMS from the bank that said, “Dear customer, effective April 23, 2009, the cash limit on your ICICI Bank Credit Card No XXXX has been reduced to Rs 0 and the total credit limit to Rs 19,000.’’
His earlier cash limit was Rs 19,000 and the credit limit was Rs 60,000. The bank has tweaked his credit limit despite the fact that this customer never defaulted on payments. On Friday, several ICICI Bank customers received similar messages.
In fact, most private and foreign banks have lowered credit limits, including that of cash, on cards as they fear the economic slowdown is affecting incomes of cardholders, following salary cuts and layoffs by many companies.
Lenders like HDFC Bank, Axis Bank, Citibank, Deutsche Bank, Standard Chartered Bank and HSBC Bank too have reduced their customers’ credit limits.
ICICI Bank ED V Vaidyanathan said cash limits have been tweaked on the basis of creditworthiness of cardholders. “In many cases the limits have been enhanced for customers having good repayment records,’’ he added.
A senior official of a foreign bank said that due to global liquidity crunch, they were forced to cut exposure to credit given to card, where default rate is as high as 15% against below 5% in the normal banking business.
Banks can access information on all cardholders from the Credit Information Bureau of India (CIBIL). In an attempt to contain default rates, banks are keeping a close watch on creditworthiness of customers in the light of total credit taken on various cards and changing the limits accordingly.
At present, there are 25 million credit card holders in India. The total outstanding on the credit card, according to one estimate, is around Rs 25,000 crore. A banker said that default rate on card business is not alarmingly high in India as in the US, where total outstanding of card business is around $2 trillion.
‘Banks are special’
Banks are special within a financial system and failure of one bank can have a strong contagion on other banks with no respect for international boundaries, said RBI deputy governor Rakesh Mohan, according to an agency report.
“A failure of one bank can have a strong contagion on the rest of the banks, even if they are healthy,’’ Mohan said. The banker said the global crisis has again shown that markets can fail and such market failures have huge costs. The financial system is prone to excesses, given the high leverage of banks and other financial institutions, he said.
“In this age of globalisation, as the current crisis has revealed, the lack of confidence in banks in one country can also have a contagion on banks in the rest of the world,’’ he said, adding the crisis has again shown that markets can fail.