Interest Rates on Credit Cards to increase
By Ankit Sharma
May 26, 2008
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Adding to the menace of inflation, the consumers would have an additional headache to suffer. Keeping pace with an increase in interest rates on almost all kinds of loans, credit cards, too, are becoming costlier if dues are not paid on time.

Following in the footsteps of ABN Amro Bank, which has raised its interest rate on credit cards from 3.1% to 3.5% per month, many other banks seem to be heading the same way.

Effective from 1st June, the new rate of interest for credit cards from ICICI Bank will be 3.40% per month (49.36% annually) for all blue, silver and gold cards. For platinum and titanium cards, initially the rate will be 3.15% per month (45.09% annually) but it may increase to a maximum of 3.40% per month (49.36% annually) in case of a default.

"A hike in the cash-reserve ratio (CRR) by the Reserve Bank of India (RBI) may not be the reason behind banks increasing the rate of interest on credit cards. Cost of funds, cost of service and the credit risk factor play a major part," says K. Unnikrishnan, deputy chief executive, Indian Banks’ Association. The latest recovery guidelines of the RBI, which has affected the banks’ recovery amounts and which has put them under a lot of pressure has also been blamed for the hike in the interest rates.

Mr. Unnikrishnan adds that, "The RBI has given banks the freedom to decide their interest rate on credit cards as of now. Therefore, there is no ceiling on the amount that they could charge. But the RBI can regulate it if the need arises."

However, there might be respite for some customers. Just like last year, all banks increased their interest rates, but HDFC Bank Ltd. kept its interest rate constant. There is a possibility that not all banks may hike credit card rates. This time, too, HDFC Bank may not hike their interest rate as it enjoys a large customer base. However, not all bank customers might be similarly blessed.

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