In recent times, an increasing number of bank customers have voiced concerns over the sudden decrease in their credit card limits.
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While the State Bank of India (SBI) has faced criticism for implementing such actions without clear explanations, it has come to light that SBI is not alone in this endeavor.
Other prominent banks, such as HDFC Bank and RBL Bank, have also taken similar measures. This trend aligns with the guidelines set forth by the Securities and Exchange Board of India (SEBI), which empowers banks to assess customer credit limits based on spending and repayment behaviors.
Consequently, they may opt to either increase or decrease credit limits based on individual cases.
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Several key factors contribute to banks’ decisions to reduce credit card limits:
- Elevated Default Cases: The Reserve Bank of India has reported a significant rise of 1.94% in credit card default cases by the end of March 2023. During the same period, outstanding credit card debt surged to Rs 2.10 lakh crore, compared to Rs 1.64 lakh crore in March 2022. The escalation in default incidents negatively impacts credit scores, prompting banks to reassess and potentially lower credit limits.
- Escalating Delinquencies: Instances of credit card payment defaults extending beyond three months raise red flags for banks. A recent Transunion Cibil report revealed an uptick in credit card payment defaults in the quarter ending June 2023. In response, banks adopt stricter credit policies to address the growing concern of delinquencies.
- High Utilization Ratios: Banks closely monitor a customer’s credit utilization ratio, which indicates the proportion of available credit that has been utilized. A responsible and prudent user typically spends around 30-40% of their credit limit. However, customers with utilization ratios exceeding 70% become a cause for concern as they are viewed as potentially riskier by lenders. Consequently, banks may curtail credit limits for such customers.
- Dormant Cards: Infrequently used credit cards often face reductions in credit limits. Banks generate revenue when customers actively use their credit cards. Inactive cards, on the other hand, offer little benefit to lenders, leading them to reduce credit limits and potentially allocate the freed-up limit to active cardholders.
In essence, the decision to reduce credit card limits stems from a combination of factors, including the surge in default cases, a rise in delinquencies, high credit utilization ratios, and the presence of dormant cards. These actions align with SEBI’s guidelines and underscore the importance of responsible credit management to maintain a favorable credit standing.