Page 93 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes Factors Determining Credit Card Interest in India

Depending on their credit worthiness, the credit card interest rate in India varies from bank to
bank and even person to person. Still the banks setup credit card interest in India by taking into
consideration the following factors:
1. Prime Lending Rate (PLR): This is the standard rate, based on which banks determine the
interest rates of various loan products.

Example: A bank may decide to setup a credit card interest at a fixed rate of 0.5% over the
PLR. This means that if the PLR increases or decreases, the card interest will vary accordingly.
2. Repo rate: This is the rate at which the Reserve Bank of India lends money to other
commercial banks in the nation. Consequently, if this rate increases, the banks charge
higher interest rates on its credit cards.
3. Reverse repo rate: This is the rate at which the RBI borrows from commercial banks.
Therefore, if this rate is high, the banks have more funds and are willing to lower credit
card rates.

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Caution The credit card has a zero deposit rate but it charges fees for withdrawing money.

Cap on Credit Card Interest India

The Supreme Court enforced a judgment on capping credit card interest rates at 30 percent in
2008. According to Business Standard, the annualized range of interest charged by major banks
in the absence of the interest cap was:

Table 6.3: Credit Card Interest Rate of Major Banks in India

Bank Interest Rate (%)
Citibank 18.00- 42.00
ICICI 18.00- 49.36
Standard Chartered 23.88- 40.80
HSBC 33.00- 38.40
HDFC 36.60- 39.00

Parties Involved in a Credit Card Transaction

The various parties involved in a credit card transaction are:
1. Cardholder: The card bearer who makes the purchase, i.e. the consumer.

2. Card-issuing bank: The financial institution which issues the credit card to the cardholder.
This bank bills the consumer for repayment and bears the risk that the card is used
deviously. Cards issued by banks to cardholders in a different country are known as
“offshore credit cards”.
3. Merchant: The individual or business which accepts the credit card payments for products
or services sold to the card bearer.

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