June 1 - 7, 2009

The exuberance in credit card-a massively penetrable product of consumer finance-is becoming numb like a falling house of cards as quickly as it was spiralled upward a few years back in Pakistan where general inclination of spending more than income made credit card cash in on unrestrained spendthrift of most of the urban households-middle class.

From Rs33.53 billion in June 2006 disbursed by different banks as credit card debts, the amount jumped to highest over Rs46.91 billion in November 2007 and then onwards it continued to tumble down to have reached to Rs37.58 billion in March 2009. The reversal might emerge out of global recession exactly inflamed in November 2007 and that might have induced precautionary measures of local banks to play safe in credit card debts. However, this is just a paradox, as banks in Pakistan had not assimilated the impact of global financial turmoil until then. The triggers sprouted in the local banking system had actually forced down disbursal of credit cards debts.

One forceful was increasing default rates. In other words, rising receivables due to credit card debts have made banks realized that what they were sanctioning freehandedly were non-secured loans. Since the credit cards came in to being, they have been presumed non-secured. That implies their being security-unlaced characteristic. Unlike, for instance, transport loans that provide with banks physical assets for foreclosure, credit card debts are bereft of any such security. In case of non-payment, banks have no option than branding the credit card debts non-performing. Alternatively, they could resort to thuggish style in order to recover outstanding debts. Not long ago, banks used to recover loans as such through hiring contractual team of tough guys who harassed delinquent credit card holders to recover dues. Now, the unprincipled ways of money recoveries are perhaps dyeing down since state laws have taken notice of them seriously.

With no other short-term alternatives, credit card departments of banks are still not out of wood. Therefore, the compensation they are mustering is from high interest rate and sometimes-unjustifiable service charges. This is the very reason that is drying up the credit card market. When credit card was introduced in Pakistan, it targeted niche market. Not everybody was qualified for credit card debt at that time. Banks categorized different localities on the bases of various criteria. Accordingly, areas that had high probability of slipping loan repayments were enlisted in negative zone and thus people of such areas were ineligible for credit card. Similarly, issuance of credit card was also conditioned with occupation of the applicant. It is a time recallable when banks started to throw cards like air drops to all and sundry with considering criteria making all qualified.

At present, people have become weary of paying amount sparklingly beyond what they drew in hard cash by using their credit cards. The complaints of credit card holders hinge on single commonality that "banks make us pay more than what and how we are serviced". Charges are concealed or ambiguous and imposed without proper communication with the holders. For long, State bank of Pakistan condoned unfair practices of credit card issuers. With pressure build-ups from the civil society organizations and media, it finally paid heeds to the grievances of credit card holders. State bank's notification issued this year would perhaps prove a challenge to antisocial behaviour of financial institutions who might have found bases for their actions in cardholders' apathy for them. Even then, what justifies victimization of docile customers?

Slow down in rate of annual reactivation of credit cards has also played an important role in decelerating disbursement. Holders either surrender their cards or stop using them until validation period ends. According to the guidelines issued by the Sate bank, credit card issuers are advised to quote interest rate and service charges on annual basis. State bank frees banks and development financial institutions to set freely rates, but requires them to define well service level for each of the product whether charged or free. Issuers must inform credit card holders of rates. Without the prior consent of holders, they cannot levy any charges apparently undisclosed or inexplicitly mentioned at the time of selling credit card.

During the first quarter of this calendar year, overall credit growth remained subdued. In spite of this, banks earning continued to stay at positive side due to higher interest spreads and margins. Despite that credit card debts disbursement growth in the last month of first quarter reversed slightly over the preceding month, they could not dent the profitability of banking sector because of the same reason. Average spread of the banking sector in 1Q2009 was recorded at 7.7 percent, an upsurge of 62 basis points year on year. Higher KIBOR and yield on Treasury bills were main reasons for the rise in interest spreads and margins as increasing cost of funds was mostly offset by higher yields on earning assets. Swapping of credit cards on petrol pumps are now becoming rare sight with many gas stations hang on a sign of 'no credit card acceptable'. Technical faults are regretted, it says further. But, do all of them have the same glitches? Apart from technical faults, which never so frequently developed in early time, this reflects reduction in usage. Credit card holding relieves one of a duty to carry along hard cash and electronic payment facilitation provides many hassle free shopping experiences. Be that as it may, this peculiar sector needs upgrades in regulation and technology to become people-attractive. Be that as it may, for low income Pakistan this is a premature concept.