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You can now say good bye to freebies on credit cards, personal loans

For retail customers, the party may be over. Long used to being wooed by banks with attractive rates, customers now need to brace up to marginally higher interest rates on personal loans.

A cut in banks’ promotional schemes on credit cards like cash backs may be underway. Banks have been forced to think of resorting to such measures with the Reserve Bank of India revising the norms on personal loans. Banks will now need to provide more capital while disbursing personal loans or on their credit card outstandings.

For banks, it is a double whammy. It is not just setting aside more capital, but also the impact on the bottomline. Profitability on both the personal loan and credit card segments is likely to be impacted since they cannot pass on the burden of a higher capital charge on to customers.

RBI, on its part, has justified the move, citing higher defaults in credit card receivables and personal loans. Credit card outstandings as on October 27, 2006, rose 51.1% over the last one year by Rs 4,016 crore. The sharp growth can be gauged from the fact that total outstandings on credit cards have gone up by 74% to Rs 11,870 crore as on October 27 from Rs 6,818 crore as on June 23. The personal loan segment witnessed a growth of close to 22% between June 23 and October 27.

"The impact of an increase in general provisioning on credit cards and personal loans clearly would create an upward pressure on pricing these loans. However, even on the current portfolio, banks would have to create an additional 1% provisioning in the last quarter of this year. This would result in a major impact on the fourth-quarter earnings for some banks," says Viren H Mehta, director, Ernst & Young.

With interest rates on credit cards being pegged at an average 2.95-2.99% on a monthly basis, in recent times banks have been offering cash back schemes ranging anywhere between 1-10% to customers. In the light of the revised norms, such offers may be cut or rolled back. In a cash back scheme, for every Rs 100 spent by a customer on a card, the bank would pay back from Re 1 to Rs 10 depending on the scheme.

News Source:
http://economictimes.indiatimes.com

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