Protection Card – The Hindu BusinessLine
As a regulator that wears many hats, the Reserve Bank of India is often criticized for focusing too much on its macro objectives, while neglecting its mandate to protect customers. But its recent Master Directions, which dramatically rewrite the rules for issuing credit cards, can do a lot to improve the experience for credit card users. Complaints against credit card issuers figure prominently in the RBI Banking Ombudsman’s annual reports, with the number of such complaints more than tripling from 12,647 in FY18 to 40,271 in FY18. Exercise 21. Unsolicited card problems, billing for undelivered cards, misreporting defaults to credit bureaus, collecting excessive fees and interest, and heavy-handed tactics used by debt collectors are the main grouses released by customers. The Master Directions address most of these issues.
Banks’ practice of issuing unsolicited cards and upgrades without customers requesting them is a key source of fraud, as these cards are misused before they reach the customer. The new instructions close this gap by requiring explicit written customer consent for a new or upgraded card, with OTP authentication required for activation. Acquiring a credit card is often much easier than returning one, with unused cards likely to rack up unwitting criminal charges. RBI has reduced this risk by requiring issuers to deactivate cards within seven days of a customer’s request and initiate closure if a card is not used for a year. Most card mis-selling and identity theft occurs through telemarketing. RBI has now entrusted credit assessment using customer data solely to the issuing bank, while treating all partners as sales agents. Fintech companies that partner with banks and use data analytics to issue cards aren’t happy with the move, but it’s a key customer protection measure. Many card users find themselves in a debt trap because they don’t know the basic terms and conditions, such as charging interest if you pay only minimum contributions and charging interest when contributions are converted into NDE. They also confuse monthly interest rate with annual rates. Card issuers have now been asked to be more transparent by quoting interest in terms of annualized percentage rate, disclosing the interest component in EMIs, and sharing important card terms and conditions across multiple touchpoints. As welcome as these steps are, they may not protect card users if they remain lax in reading the documentation.
The instructions also attempt to address the problem of delays and failures in reporting by card issuers to credit bureaus, which lead to poorer credit ratings. Issuers will be required to give card users seven days notice of such a report. But it’s not just credit card defaults that lead to a lower credit score, but also multiple card use and high credit utilization. It’s also ironic that although issuers use credit scores as a key element in deciding whether someone qualifies for a card, they don’t offer better interest rates to customers with good credit scores. RBI should push banks towards differential rates and address the opaque operation of credit bureaus.
May 08, 2022