Credit cards are becoming increasingly popular in India due to rewards for high spending, discounts on shopping and travel, ease of loan application, lounge benefits, and other perks. However, many users are now trapped in a cycle of "never-ending" EMI payments. This increased reliance on credit cards has also resulted in an increase in defaults, with non-performing assets (NPAs) in the segment rising by 28.42% year on year to Rs 6,742 crore as of December 2024, according to the most recent RBI data.
From Rs 5,250 crore in December 2023 to Rs 6,742 crore in December 2024, the gross non-performing assets (NPAs) in the credit card segment increased by Rs 1,500 crore. Due to excessive spending, financial difficulties like losing their jobs, and high interest rates on outstanding balances, people are finding it more difficult to pay off their credit card debts. As of December 2024, these non-performing assets (NPAs) accounted for 2.3% of all outstanding credit card loans, which totaled Rs 2.92 lakh crore. The total amount owed in 2023 was Rs 2.53 lakh crore, and the NPA ratio was 2.06%.
The trend is even more noticeable when credit card defaults are examined over a longer time frame. In sharp contrast to the general trend in the banking industry, credit card non-performing assets (NPAs) have risen by over 500% from Rs 1,108 crore in December 2020. In December 2023, gross non-performing assets dropped from Rs 5 lakh crore (2.5% of total advances) to Rs 4.55 lakh crore (2.41%), according to reports.
Banks and other financial institutions now classify credit card debts that have not been paid off for a predetermined amount of time—usually 90 days or more—as non-performing assets (NPAs). A credit card user's outstanding balance turns into a non-performing asset for the bank after they miss three consecutive months of minimum or full payments. The bank charges 42-46% annual interest on the outstanding balance, and his credit score plummets.
According to RBI data, credit card receivables were worth Rs 2.92 lakh crore as of December 2024, with Rs 6,742 crore of that amount classified as non-performing assets. Credit card receivables are the total amount that customers owe banks or credit card companies for using their cards.
The RBI raised the risk weights for banks' exposure to consumer credit, including loans to NBFCs, credit card receivables, and personal loans, by 25 percentage points in November 2023, making the risk weight 150%.
"Even as inquiry volumes remain robust, the impact of an increase in risk weights on certain segments of consumer credit pulled down the rate of growth in overall consumer credit, especially personal loans and credit cards," according to the RBI's Financial Stability Report (FSR).
The amount of capital required by a bank to cover potential loan losses is determined by its risk weight. Higher risk weight requires more capital, making it more expensive for banks to lend in that segment. This is done to prevent financial instability caused by a sharp increase in unsecured loans and credit card debt.
"Customers should be aware that if they carry card balances beyond the interest-free period, they may end up paying an interest rate of up to 42% in some cases. "It will trap them in debt," a bank official told.
