Credit card spend declines as virus restrictions hamper consumption drive

• Sri Lanka has little hope in generating desired output goals with consumption accounting for over two thirds of the country’s economy

Outstanding balance of credit cards has continued its descent through June in a reflection of the extent to which consumer spending on general shopping to durable goods to broader services activities have shrunk after the fresh restrictions on travel and other activities were imposed since mid-April to stem the virus resurgence. 

The total outstanding credit card balance, the more distant gauge of the consumer spending in Sri Lanka contracted by Rs.1,042 million in June to Rs.118.6 billion, marking decline for the second month in a row after a five months long rising streak which continued through April.  The decline in the total outstanding credit card balance could also reflect another phenomenon where the salaried individuals who account for the largest stock of cards may have paid off their credit card debt during the last couple of months, when their spending opportunities lessened significantly during virus related restrictions such as going on excursions and dining out.

When people have excess cash, they tend to pay down their credit card debt first because such carry the highest interest. In Sri Lanka credit card debt is 1.5 percent per month or 18 percent per annum, down from 28 percent applicable on them up to August 2020. 

Although lockdown styled restrictions increased cash hoardings of the fixed income earners such as the salaried, the restrictions dislocated the incomes of many millions of people, earning daily wages and others generating irregular incomes such as the small business owners. 

The virus restrictions have vastly affected the incomes, pushed prices of many commodities and significantly limited the in-person services and outdoor activities, taking a massive toll on the consumption drive which led the first quarter economic recovery for the most part.  In the absence of a vibrant consumption, Sri Lanka has little hope in generating its desired output goals as consumption accounts for over two thirds of the Sri Lankan economy. Despite the slowdown in their credit card portfolios amid the virus induced challenges, banks were seen aggressively pushing to expand this line of business as this is one of very few avenues which generates them higher net interest incomes and even higher fee incomes.  For instance, banks added little under 20,000 new cards in June, bringing the total new cards issued to 64,000 during the first six months. 

By June end, Sri Lanka had 1.94 million in active credit cards for a population of 22 million and a labour force of 8.44 million, reflecting massive room for penetration.