Moratorium and Credit Card Limits

After the COVID 19 issue came up there has been several complaints from the customers of Axis Bank, Kotak Bank, via Twitter about a sudden reduction on their credit card limit.

1. Some complained that their limits in the Credit cards have been reduced by 80% over a period of one week.
2. Some of them said that they saw a reduction in their limits since they opted for a moratorium on their cards.
3. Some others said that they were affected even though they took a moratorium for their personal loans but paid their credit card dues on time.
4. Few others reported that their cards were blocked even though there were no outstanding dues against them. So what’s happening?

Though customers are linking this with the ongoing financial crisis due to covid-19, bankers contend that this is a regular and ongoing exercise and not linked to the Corona issue.  They say that based on credit card spends and repayment data,  they analyse credit limits of customers, and offer to increase or reduce the credit limit, depending on the case.

However, some of these actions may indeed be linked to the current financial crisis. According to intermediaries, banks are reviewing customers on risk parameters given the current scenario.  Since there is a total halt in the economic activities, all issuers are reviewing their portfolio and taking immediate action where they feel the risk is higher.

Growth in credit card outstanding

Who is hit due to this?

• Typically, credit card issuers start reviewing their portfolios in times of economic stress more aggressively to cut down the risk.
• Different parameters are taken into consideration, to check if any segment of their portfolio could be under stress, and identify customers accordingly.
• In a banker’s view, certain segments of their consumers can be categorized as more stressed than others in the current situation and hence, they reduce the limits to curtail spends on consumers on cards.
• In particular, self-employed customers, from sectors like travel, holiday, entertainment and so on, are likely to be impacted.
• Under salaried segment, where they may be more at risk of facing job losses or financial difficulty, in the bank’s view, might see their limits reduced.
• Many customers have their credit limits in intact, but banks have either reduced the ATM cash withdrawal limit of their credit cards or withdrawn the facility altogether.
• The cash withdrawal limits vary among customers. It may be noted that charges on cash withdrawal on a credit card are high. If someone uses this facility, he would be financially very stressed. Banks don’t want such cardholders to get into a debt trap as they can turn into non-performing assets (NPAs).
• Banks also segment their customers by different risk profiles. For example, Cardholders who have shown an irregular payment pattern in the past are considered to have a relatively higher credit risk.
• Around 65-75% of cardholders pay their dues on time, but around 25-35% of them revolve their credit card outstanding or pay only a small percentage, according to industry estimates.
• Such customers are most likely to see a higher impact on their credit lines. If someone has a limit of, say, ₹5 lakh with dues of ₹3 lakh and has been paying only a small percentage of the outstanding, banks could reduce the limit of such cardholders and if these customers spend more on their cards, it is likely to turn into NPA.
• One more category is those who have opted for moratorium. Some issuers have started blocking cards of customers who have availed the facility of  moratorium on outstanding repayment.
• Blocking the credit cards temporarily of such people can be a part of banks’ strategy to contain the risk of increased NPAs after the moratorium period.
• This the banks add that is to suit the interests of both the cardholders and the concerned banks. As credit card debt attract high-interest rates (over 40% a year), blocking the card might save those cardholders from accumulating ballooning credit card debt. However this is said to be done on a case-to-case basis.
• Equally, customers who have availed of moratorium on their personal loans are also seeing their cards blocked for the same reason. Opting for moratorium on personal loan means the customer has cash flow problems.
• One more aspect is that many customers could have a high credit limit but use only a part of it. A cardholder, for example, may have a ₹2 lakh limit. But for the past 12-24 months has been using only ₹10,000-20,000 a month. Banks have started reducing the credit limit on their cards to prevent any fraudulent usage even if they were regularly repaying in full.
• Another category of customers is those with changing spends. Here, banks also study the spending of consumers and categorize their spends.  During the lockdown, the only item where most consumers are spending is groceries and possibly, they will not be using the card for now. Once restaurants and multiplexes open, issuers could restore the entire limit.

Who are the beneficiaries?

• Banks are indeed cutting down limits to curtail risk, but they are also asking low-risk customers for limit enhancements. Typically, these are banks which primarily issue cards to those with whom there is an existing relationship.
• A low-risk customer is, typically, someone who has been using over 50% of the credit limit during some months and clearing the dues on time. For example, let us say, there is a customer who has a ₹1 lakh limit, spends around ₹60,000 and repays the money on time.  Here, banks may decide that this customer may not default, and will continue spending and the bank can offer to raise the credit card limit for such customers.
• Bankers also add that based on credit card spends and repayment data, they analyse credit limits of customers, and offer to increase or reduce the credit limit, depending on the case.
• But some of these actions may indeed be linked to the current financial crisis. According to intermediaries, banks are reviewing customers on risk parameters given the current scenario.