Wednesday, August 17, 2022

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Sri Lankans reduce the use of credit cards in economic downturn

Sri Lankans, whose real incomes are getting hammered on a daily basis from soaring inflation, have reduced the use of their credit cards, as there was a slight drop in the outstanding balance of credit cards, when the financial and economic misery became more pronounced

According to the cards data, the outstanding credit card balance has come down slightly by Rs.2.19 billion to Rs.136 billion as of May –end from Rs138.19 billion in April

Sri Lanka banks introduced another hike in interest rates charged on credit cards as the Central Bank lifted administrative caps on credit card and other select loans, giving complete leeway for banks to set the prices of such loans.

Banks which initially raised their rates from 20 percent to 30 percent from May onwards in response to the April policy rate hike are now raising their rates again to the north of 40 percent as one bank yesterday announced its decision to raise cards’ interest rate by another 6 percent to 36 percent effective from July.

As uncertainty mounts and the pressure builds up again on Treasury yields on the back of the worsening economic crisis, banks are adjusting their rates to effectively prevent people from swiping their cards when the going gets tougher with runaway prices.

Other banks have also indicated that they are considering similar moves and would follow suit with sizable increases in their rates as they run a greater risk of non-performing loans from cards.

As the Monetary Board accelerated the pace of policy rate hikes since January onwards, the Central Bank in March raised the hitherto prevalent ceiling rate on credit cards from 18 percent to 20 percent only to fully remove any administrative rate caps on the collateral-free pre-approved loan facilities on April 10.

Although there was a sudden spike seen in the card balances, the steep increase in the interest rates on credit cards could make conditions worse for the cardholders, prompting them to think twice before swiping their cards.

After the Central Bank eliminated the maximum interest rate ceilings on credit cards in the third week of April to reflect the fast-rising interest rates in the economy, the banks soon raised their interest rates up to 30 percent on the cards’ outstanding balance, which came into effect from their next credit cycle.

Meanwhile, the banks are also tightening their credit standards and are declining requests for balance enhancements and requests for new cards, irrespective of the applicants’ credit standing. Some banks do not even provide reasons for the rejection of the request, a very bad practice by them.

However, the banks also face heightened credit risks from their card customers, as they confront wilful defaulters after using the entirety of the balance in the card. Credit card is a clean facility marked by a bank to its clients and no security is typically involved.

In an economic downturn in the likes of what Sri Lanka is facing today, credit cards are the last to be settled after all other loans by the borrowers. Hence, the banks face a higher risk of non-performing loans from credit cards

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