29 August 2022 09:10 am Views - 5274
The change in card balances through the end of July provided a sneak peak view of the large-scale pullback on
The Central Bank data showed that the July credit card balance had fallen by a massive Rs.3.96 billion, the largest in recent months tipping the year-to-date change to a negative Rs.564 million, in a sign that banks are bracing for smaller loan books and balance sheets when they close their books for the year than from where they started the year.
By the end of July, licensed commercial banks had a cumulative outstanding credit card portfolio of Rs.132.72 billion, compared to Rs.133.29 billion at the start of the year.
However, it is yet to be seen if July slump is a good indicator of what could come in the ensuing months as acute fuel shortage that engulfed the first three weeks of the month may have distorted the figure as people started working from home, cut down on travel and greatly reduced spending at restaurants, hotels and other recreational activities.
In any case, large scale pullback on consumer spending is a result of Central Bank’s broader efforts towards demand destruction in a bid to rein in inflation which was running at 67 percent nationally in the year through July.
Meanwhile, the June quarter earnings season which ended roughly two weeks ago showed a preview of what could come in the back half of the year as most banks have reported muted growths in their loans, which were also largely coming from the one-off massive foreign currency translation differences caused by the free fall of the rupee.
While the consumers are also pulling back on their purchases amid the soaring prices as they are feeling the squeeze on their purse strings, banks have also tightened their credit standards, making borrowing unaffordable and inaccessible to a large majority.
For instance, credit card interest rates have doubled in less than six months to 36 percent, making spending on cards effectively a non-viable option and entrapping those who spend on cards in a debt spiral.
Further, some banks have already cut pre-approved limits of their card holders, citing challenging macro-economic conditions to minimise what could become a hurricane of non-performing loans, while others are considering similar moves to blunt any large scale fallout from possible defaults.
The second quarter of banks’ earnings took a heavier beating with some banks reporting losses mainly due to massive loan loss provisions and holdings of foreign currency denominated financial assets, which rose multifold from last year’s levels.
While credit card spend doesn’t provide a close proxy for the overall consumer spend in the country due to extremely less number of cards in use, it provides the distant gauge of the changing spending patterns by the salaried.
However, consumer spending at a broader level has plunged at staggering proportions with at least two thirds of the population having lost access to three meals a day after the economic crisis pushed a large swath of the population into poverty.
Meanwhile, the number of cards in issue slipped by 2, 927 in July after falling by a steep 7,507 in June as banks held off from promoting new cards while becoming tough on those who appeared to be readying to wilfully default on their cards.