RBI’s move to make credit cards UPI-enabled isn’t an unalloyed blessing

Buy-now-pay-later (BNPL) is what the high priests of consumerism expound.  When it is resorted to by the merchant himself, there is no danger for the nation’s financial system as the buck stops with the merchant keen to push his sales.

But, when banks encourage people to do so by liberally distributing credit cards and now by allowing the card holders to link the cards to their cell number (UPI), the hazard can be two-fold.  First, mindless spending by consumers, casting caution to winds. Second, banks being singed by defaults in repayments. In addition, it also cannibalises the merchant credit, much to their resentment.

Also read: Now, you can link UPI with your credit cards; here’s why RBI wants that

Credit card is a good business opportunity for banks and, in recent times, for NBFCs, some of which have been duping gullible consumers. This, in fact, was the trigger for the RBI initiative to wean them away from such dubious apps.  Credit card is an unsecured revolving loan and carries a whopping 40 per cent annualised interest income for the lender, who is less exacting in his appraisal of the creditworthiness of the cardholder than when he applies formally for a loan.

RBI has capped an individual’s unsecured loan entitlement to 10 per cent of his net assets, but it is common knowledge that this guideline is followed more in ignorance, if not in breach. Again, issuance of unsolicited credit cards is prohibited by the RBI but that fiat is followed more in breach.

RBI instructions ignored

Card-issuers shall inform the cardholders of the implications of paying only ‘the minimum amount due’, admonishes the RBI. A legend/warning to the effect that “Making only the minimum payment every month would result in the repayment stretching over months/years with consequential compounded interest payment on your outstanding balance” shall be prominently displayed in all the billing statements to caution the cardholders about the pitfalls in paying only the minimum amount due, says the RBI. Banks encourage minimum payment to escape NPA classification, inevitable when default continues beyond 90 days, and also to earn usurious interests.

The easy availability of credit card often tantalises consumers into using it with gay abandon. Tie-up between merchant establishments, say a popular restaurant and specified bank’s credit card resulting in discount for the consumer there, is an added gravitas for equipping oneself with multiple credit cards. The card one swipes at each establishment depends upon which begets more discount and cashback.

It is not as if the RBI has committed any cardinal or carnal sin by linking credit cards with UPI, except that scanning the ubiquitous QR codes has become so much easier for consumers. It is almost fun, so much so that itinerant vendors carting peanuts too are doing good business armed as they are with QR codes.  Juice vendors attract a lot of customers when a pedestrian whips out his cell phone and scans the QR code of the vendor when the oppressive heat gets the better of him. Any easy access to credit is an invitation to blasé spending. The silver lining, of course, is that small traders are doing more business.

UPI transactions up five-fold

With Covid giving a big nudge for adoption, UPI transactions in India have shot up nearly five-fold in value in just two years, with monthly transactions topping Rs 10-lakh crore in May 2022. UPI has replaced cash in low-ticket transactions, such as purchases from kirana stores or paying cab bills. Large transactions, such as buying white goods, still remain credit-card driven. By allowing consumers to use UPI not just for cash transactions but for credit-enabled ones too, RBI seems to be nudging UPI adoption for mid- to high-value transactions as well.

Also read: Experts’ take on repo rate hike: RBI has struck right inflation-growth balance

But banks are not viewing the RBI move with complete glee. Credit cards allow them to charge high fees in the form of MDR or merchant discount rate charges at 2–3 per cent of transaction value, while UPI is a free interface. There’s the lingering doubt of who will bear the MDR on UPI-driven card transactions. Unless the RBI is willing to foot the MDR bill through Payment Infrastructure Development Fund, just like it is doing for UPI dependent merchants, banks run the risk of losing considerable revenue under sufferance.

For banks, credit card transaction revenues (mainly from MDR) account for 30 per cent of the total pie. That’s not all. What could be viewed with greater trepidation is the grim prospect of heightened credit risk should the credit card user base jump manifold, driven by low-ticket transactions.

To be sure, RBI is piloting this project only with RuPay cards, which account for less than 5 per cent of the credit cards in force. Should this experiment succeed, as is likely, RBI will need to think through aspects relating to MDR charges and the incidence of credit risks before it moves forward with a full-scale roll-out across other card providers.

COVID impact

At the height of Covid, credit card outstandings to banks reached a staggering Rs 1 lakh crore. Banks became cautious when it was accompanied by higher defaults. The first signs of danger were visible at the card subsidiary of India’s largest public lender, the State Bank of India (SBI). SBI Cards and Payments, the second-largest card issuer in the country, has witnessed its gross NPAs doubling to 4.29 per cent in the second quarter of 2020-21.

Banks then chose to negotiate and come to a settlement which was lapped up by the consumer, but this cannot be a recurring feature. Any tough measure against the common people would be attacked by opposition parties on the ground that a government which blinks at NPAs by well-heeled industrialists ought not be harsh on the small man. Debt recovery tribunals to recover small dues from millions of possible defaulters is simply not feasible. And that could make small borrowers laugh up their sleeves.

(The writer is a CA by qualification, and writes on business, consumer issues and fiscal laws.)

(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal)