Interest on credit cards capped at 20%

The Bangladesh Bank has fixed the maximum interest rate for credit card loans at 20%, which bankers term yet another shock for their retail business.

"The rate cap has been set to rationalise the profit limit on credit card loans and in the interest of consumers," states a Bangladesh Bank circular issued on Thursday.

Previously, credit card loans were excluded from any interest ceiling when the single-digit interest rate cap was imposed on consumer bank loans on April 1, 2020.

The central bank's current move comes at a time when the credit card business is booming, with an increasing number of users and transactions.

At the end of July this year, the number of credit cards issued increased by 10.56% to 15.98 lakh compared to the figures of the same month of the previous year.

In July, monthly transactions through credit cards rose to Tk1,252crore from Tk1,048 crore in the same month of the previous year.

"The decision will impact the initiative of building a cashless society as now banks will not feel interested in issuing new credit cards since business will not be profitable any more at a 20% interest rate," says a senior official of a leading bank

The Bangladesh Bank came up with the interest rate ceiling against the backdrop of charging a high interest rate by banks, violating the guidelines on credit card operations issued in 2017.

According to the guidelines, for credit card loans, banks can charge the highest interest rate of consumer loans plus 5%. At the same time, credit card customers are allowed to withdraw 50% of their credit limit in cash.

The Bangladesh Bank has found that some banks have been allowing customers to withdraw cash in amounts more than the authorised limit and charging a high interest rate on those loans, putting customers at risk of being burdened by interest.

Moreover, banks used to charge interest on credit card dues from the first day of a transaction and charge a late fee at a progressive rate on unpaid bills.

Such aggressive business activities by banks have prompted the financial regulator to set the interest ceiling for credit card loans, said a senior executive at the central bank.

From now on, banks cannot charge more than 20% interest rate on credit card loans. At the same time, banks can charge interest on due loans from the last payment dates instead of charging from the first transaction dates.

Banks will be able to charge late fees only once and customers will not be allowed to withdraw cash against their credit cards more than 50% of their limit, according to the new circular.

Currently, banks charge interest at over 25% on credit cards, according to data from the Bangladesh Bank.

Earlier on May 11, the central bank issued guidelines on credit card operations. For the first time, it has set a limit on the interest rate on credit cards.

The interest rate of consumer loans plus 5% means the interest rate on credit cards will be 16-17% – nearly half the then existing rate.

But banks kept the interest rate at a high level in a tricky way by introducing a consumer product at a high interest rate.

Although the new interest rate cap will give credit card customers relief from the burden of high interest, it will hurt the retail business of banks, stated industry insiders.

Banks' retail business had already collapsed following the implementation of single digit 9.0 percent interest rate from April. Although credit cards were excluded from that ceiling, now the new cap will slow down the credit card business.

Chief executives of the banks say the interest capping will hamper credit card business because the suggested rate will not cover the risk premium of loan services.

A senior official of a leading bank with a large market share of credit cards told The Business Standard, "The decision will impact the initiative of building a cashless society as now banks will not feel interested in issuing new credit cards since business will not be profitable any more at a 20% interest rate.

"We have to maintain a round-the-clock call centre and a team for managing the cards, which involves a sizable cost for the bank. To deal with a Tk1 lakh credit card loan, a bank has to face the same cost of maintaining a Tk10 crore of general loan. So, credit card loans are very expensive for banks."