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Credit card interest rates: Banks accept cut with reservations

23 Aug 2020

By The Sunday Morning Business Desk While the recent reduction on interest rates on credit cards is expected to encourage the credit card usage in the country, banks are likely to incur a significant fixed cost element due to a drop in interest income. During the monetary policy meeting on Thursday (20), the Central Bank of Sri Lanka (CBSL) announced a downward revision to caps on interest rates on credit cards to 18% per annum from 24% earlier. The reduction has been done by the Monetary Board of the CBSL, considering bank lending rates of certain financial products which continue to remain high. The move is expected to cut down the interest income earned by the banks from their credit cards. Before the revision, banks were enjoying an interest income margin of about 14% while the cost of funds was about 10-12%. However, after the revision, the margin is expected to drop to 10% while the cost of funds would be 7-8%. Senior sources from the banking industry told The Sunday Morning Business that the margin is important because not all credit cards they issue are revolvers. “We earn interest only on the revolvers. There is a large segment of people who pay on time. For them, there is no interest applicable. 40% of the revolvers pay a minimum payment and carry on. The balance 60% is using the system without any income to the bank, except for an annual fee. For high-end customers, we waive the annual fee,” sources noted. They added that the reduction of interest rates is understandable considering the economic situation but said that providing credit cards as a service is a considerable running cost for the banks due to its extensive infrastructure, technological, and training requirements. “Banks are incurring significant costs for maintaining these cards, from the moment of swiping these cards to acquiring machines and training people on how to use them, these hidden costs should be covered by the interest income. This is where the problem lies. Reduction is a good thing. On the other side it is a huge running cost in the industry, and this is a fixed cost,” sources added. According to sources, credit card-related fraud is on the rise and noted perpetrators attempt to impersonate people and obtain a credit card. Therefore, banks are obliged to spend significantly on verifying equipment to avoid such fraudulent activities. If a bank is in an acquiring business, it is also maintaining several acquirers, giving them the swiping machines, training them, and reconciling them; all of these are fixed costs. According to the data from the CBSL, as of end-June 2020, the total number of active credit cards in the country was 1,826,100 compared to 1,821,108 a month ago and 1,829,927 in December 2019. Amongst these credit cards, locally accepted cards were 18,126 while globally accepted cards were 1,807,974. As of end-June 2020, the outstanding balance of existing credit cards in the country was Rs. 118 billion, out of which Rs. 85.7 billion were from globally accepted cards while the rest was from only locally accepted cards. About 23% of the credit card market share was held by HSBC Bank in the first half of 2018, while Nations Trust Bank (NTB) had a market share of 22% and Sampath Bank had a market share of 12%. However, since then, NTB is reported to have overtaken HSBC, taking the top place. Commercial Bank’s credit card market share stood at 10% in early-2018, while Hatton National Bank’s credit cards covered about 8% of the market share during the same period. Market shares of Standard Chartered Bank, Seylan Bank, Pan Asia Bank, Bank of Ceylon, People’s Bank, and National Development Bank were 7%, 5%, 5%, 4%, 2%, and 2% respectively.


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