The Rise of Credit Card Usage for Personal Payments
In 2023, personal loans and credit cards were on the rise, prompting the RBI to increase risk weights in November 2023 to mitigate bank NPAs. However, this move didn’t deter the growth, especially in credit card usage.
Credit Card Spending Trends
By February 2024, RBI data revealed a significant increase in credit card spending, reaching Rs. 1.5 lakh crores, marking a 26% annual growth. Notably, credit cards were being used for various personal payments like rent, tuition fees, and vendor payments, which raised concerns for the RBI.
The Unconventional Use of Credit Cards
In recent years, fintech platforms like Red Girraffe, CRED, and others emerged, allowing individuals to use credit cards for peer-to-peer (P2P) transactions. These platforms facilitate payments by collecting funds from the credit card holder, holding them in an escrow account, and then transferring them to the recipient’s bank account, charging a processing fee for the service.
How It Works
For instance, to pay rent using a credit card, one would register on a fintech platform, provide rent and landlord details, and make the payment through the platform. The platform then verifies the transaction and transfers the funds to the landlord’s account.
Why Use Credit Cards for Personal Payments?
Customers opt for credit cards for personal payments due to benefits like free credit periods, reward points, meeting spend-based milestones, and qualifying for annual fee waivers. However, it’s essential to be mindful of credit utilization ratios to avoid adverse impacts on credit scores.
RBI’s Concerns
The RBI is uneasy with credit cards being used for P2P transactions like rent and tuition fees, as it goes against the intended customer-to-merchant (P2M) framework. Such transactions routed through escrow accounts violate regulations, prompting RBI officials to express disapproval. They insist recipients must possess merchant payment accounts to receive such payments.
Bank Response
Banks have started addressing RBI concerns by ceasing reward points for rent transactions, excluding them from annual fee calculations, and imposing processing fees. Fintech platforms have also adapted their services to comply with regulations.
RBI’s Next Steps
Reports suggest the RBI has engaged with fintech platforms facilitating credit card payments for rent and other personal transactions, seeking transaction-related information. The future regulatory actions of the RBI regarding credit card usage for such transactions remain uncertain.
Conclusion
While banks and fintech platforms adapt to RBI concerns, the possibility of a complete ban on credit card usage for personal payments remains unclear. Observing the RBI’s forthcoming actions is crucial to understanding the future landscape of credit card transactions.
