ICICI Bank, India’s largest private sector lender, has recently withdrawn its free lifetime credit card scheme, signaling a new phase in consumer banking in the world’s second-fastest growing economy.
Till the collapse of US investment bank Lehman Brothers in September 2008, salaried people in the metros had as many credit cards in their wallets as they wanted and did not need to pay any fees for most of them.
ICICI Bank joined the game in 2005 and soon overtook Citibank, the then market leader. But the aggression took its toll. As consumers lost jobs and faced salary cuts, payment defaults pushed up the industry’s stressed assets.
As interest rates dropped and the financial system was awash with liquidity early this century, banks sold mortgages, auto and personal loans, throwing due diligence to the wind. With India Inc. finding other avenues to raise money, banks were saddled with funds that they needed to deploy.
In a mad scramble to win new customers, there were ‘mis-selling’ and ‘mis-pricing’. Since credentials of consumers were not always checked, urban consumers started overstretching themselves — buying cars, houses, holidays, white goods and shares — and repaying in equated monthly installments. When the slowdown claimed jobs, they just stopped repaying.
It was a time bomb waiting to explode. And the fuse went off when Lehman Brothers collapsed.
While banks piled up bad assets, many non-banking finance companies were either forced to shut shop or go slow on customer acquisition, and wait for buyers.
Now, with the economy back on the rails, consumer lending has resumed, but with caution. This also coincides with a few new credit information bureaus — a repository of information about the credit history of borrowers.
For the retail consumer, there is virtually no credit rating system.
But things will change soon. With the introduction of credit scores for customers, banks will decide on their creditworthiness. The new bureaus will join Credit Information Bureau (India) Ltd (Cibil), which has been operating since 2004.
The second wave of consumer banking will be a win-win situation for both consumers and banks. Worthy customers will be able to access cheap credit and wiser with experience, banks will stop wooing the not-so-worthy ones.