Tight bank rules slow down growth of credit cards

Issuing of new credit cards is expected to slow down as commercial banks tighten vetting to avoid losses associated with defaults, especially during a high interest rate regime.

Credit card issues were expected to grow by 10 per cent this year, surpassing the eight per cent increase last year but analysts now expect the conservative approach by banks to suppress growth.

“Growth will be low as many banks focus more on improving profitability of their current credit card holders as opposed to growing their credit card base,” said Victor Malu, head of future financial systems, at Financial Sector Deepening.

According to the Central Bank of Kenya (CBK) the value of transactions and the number of credit cards in circulation grew by only eight per cent to Sh4.1 billion and 122,212 respectively last year despite new card launches by various commercial banks.

In March Standard Chartered Bank launched a new Gold and a Platinum credit card, with the Platinum offering customer’s cash back on transactions. A month later, NIC Bank launched a card dubbed NIC Gold Credit Card targeting individuals who earn more than Sh200,000.

Mr Malu said that the main reason for slow credit card growth was card related losses that have forced issuers to be more rigorous in the credit appraisal, leading to rejection of many applications.

“There is a risk assessment that banks need to do before issuing a credit card and this reduces the universe of people who can qualify based on the eligibility criteria,” said Sharad Mehrotra, the general manager for retail products and wealth management at Standard Chartered Bank.

Central Bank includes credit card debt as part of the personal and household category, which had grown to Sh318.5 billion as at the end of September last year but which also had Sh18.3 billion in non-performing loans, the highest in the banking sector.

Mr Mehrotra said that the bank expects growth to be between eight and 10 per cent annually, adding that card issuance would grow once the credit reference bureau industry matures.

Suprio Sengupta, general manager I&M Bank said fluctuating interest rates and attached condition placed credit cards at a disadvantage compared to pre-paid cards, which have not so far been marketed aggressively.

Credit cards allow users to spend money without paying interest for up to 45 days while pre-paid or debit cards allow users to spend only the money loaded to their accounts.

“The slow growth is related to what is going on in personal loans. Commercial banks have become tighter…I feel that there may be more growth in prepaid cards,” said Mr Sengupta.

He said that some commercial banks went slow in marketing credit cards last year.
The number of pre-paid cards grew by 19 per cent to 22,405 but the value of transactions dropped by Sh107 million to Sh694 million according to CBK.