High rates on credit cards draw regulator’s ire

As credit cards are becoming more and more popular, the central bank thinks at least 12 banks charge too high on them and has asked them to explain why they do not follow a calibrated ceiling set two years ago.

These banks have been charging more than 25 percent on their credit cards but the Bangladesh Bank (BB) had set the maximum limit on interest rate at 5 percent over the highest interest rate on a consumer loan by the individual banks.

For an instance, if the highest interest a bank charges is 10 percent, it cannot charge more than 15 percent on credit card.  

However, these 12 banks have been charging more than 25 percent on their credit cards.

These banks are Eastern Bank, Midland Bank, Mutual Trust Bank, National Bank, NRB Commercial Bank, Premier Bank, Standard Bank, Social Islami Bank, Southeast Bank, BRAC Bank, Prime Bank and United Commercial Bank.

Three of these banks are abiding by the BB-set limit. But the central bank thinks they have deliberately made a specific loan product with high interest rate so that they can charge higher on credit cards.  

For example, one of the banks gives loans against share, a product that has rare takers, at a high 25 percent interest rate. Although hardly anybody takes loans on this category, the high rate on the product means the bank can easily add 5 percent on top of the loan charge of 25 percent and keep its credit card rate at 30 percent.

This way it can charge high on credit cards and at the same time skirt the central bank limit.

The BB has asked these three banks two weeks ago to explain the logic behind charging such high interest rates on any loan when banks have been asked to bring down their lending rate for all loans to a single digit.

But not all banks charge such high rates. Eight banks charge 15 to 18 percent on their credit cards, according to central bank data.

In India, banks charge similar high rates at between 2 and 3.5 percent monthly.

Meantime, complaints from credit card users about high interest rate are frequent.

Sharing experience of high interest rate of credit card, Abbas Uddin Nayan, a client of the NRB Commercial Bank, said he shopped around Tk7,000 on credit card but delayed to pay the bill for one day. He had to count additional Tk1,080 including interest Tk735 and late payment fee Tk345.

Though his payment delay was one day, the bank counted the delay from his shopping date. As a result, in 15 days, his interest was Tk735 for Tk7,000.

The NRB Commercial Bank has been charging 14 percent to the highest 24 percent interest rate on credit card.

Asked about the high interest rates on credit cards, Bank Asia Managing Director Md Arfan Ali said it is because the operational costs to monitor such credit card loans are high.

He went on to say that bringing down the interest rate on credit card in line with the central bank’s guideline depends on the efficiency of the banks concerned. “The banks that are efficient in fund management have become successful in reducing the interest rate on their credit cards,” he observed.

High charge, good profit

Among the banks which are operating credit cards, Prime Bank charges the highest 30 percent interest rate on its credit card. The bank has kept a loan product at 25 percent interest rate and is charging 5 percent more on top of this rate of interest for credit card.

According to data revealed by Prime Bank, it bagged an income of Tk7 crore from credit card last year against which its expense was Tk4.5 crore.

Three banks – the City Bank, Eastern Bank and BRAC Bank – are the major market players in the card operation business. These three banks hold more than 65 percent share of the overall credit card market in the country.

The City Bank, the pioneer of credit card operation having highest 35 percent share in the market, charges 25.50 percent interest rate on its credit card. The bank has cut its interest rate from 34.50 percent after the central bank set a cap on the interest rate limit. It earned Tk145 crore from credit card operation last year when its expense was Tk54.49 crore, according to the bank.

The Eastern Bank, another big market player in credit card operation having 15 percent market share, charges 27 percent, revised down from 30 percent in 2017. The bank earned Tk91 crore from credit card operation in the past year against which it spent Tk50 crore, according to its annual report.

BRAC Bank that has around 15 percent market share in credit card operation charges highest 27 percent on its credit card, down from 36 percent in 2017. The bank earned Tk62 crore from credit card operation, however, its expense has not been mentioned in its annual report.

BB guideline has little impact

Interest rates on credit cards were between 30 and 36 percent until the Bangladesh Bank put the maximum ceiling on interest rate.

After getting the BB guideline, most of the banks operating credit cards revised down their interest rates at 15 to 25 percent.

An interest rate above 20 percent on credit card is still considered high by the central bank. This is because the highest interest rates on consumer loans have come down to 10 to 12 percent, said a senior executive of Bangladesh Bank. In this perspective, the interest rate on credit card should not be more than 15 to 17 percent, he said.

Credit card users keep growing

In spite of high rates of interest, the growth in credit card loans is higher than the private sector credit growth. This is a reflection of the fact that people prefer cashless transaction, analysts said.

The loan on credit card grew by 23.43 percent to Tk4,500 crore last year when compared to that in the previous year. The average private sector credit growth was 12 percent in this period.

The default rate on credit card loans was also low at 6 percent last year when the industry average default loan was above 10 percent.

The total number of credit card users currently stands at 11.89 lakh, according to central bank data.