Why this bank’s customers are swiping their credit cards for cash

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Innovative or reckless?

Is RBL’s approach an innovative way to make a dent in the credit card market dominated by large lenders? Or will he pay the price for his assault on the road?

A private banker, who spoke on condition of anonymity, said cash withdrawals are an emergency feature of credit cards. They cannot become a basic business idea. No matter how strong a customer’s repayment record, if they casually withdraws money from their credit card, that’s a sign of emerging weakness, the banker said.

Toor said the bank was taking all necessary precautions.

For example, to reduce risk and better manage book quality, cash transactions have been blocked across the entire credit card wallet since April, he said. “Since September 1, we’ve been slowly opening it (credit card cash withdrawals) to a small group of customers with a strong repayment record. It will take about a month before the rest of the customers start to see the option available to them as well. “

In August, around 8% of RBL Bank’s credit card customers, representing 14% of the credit card loan portfolio, were under moratorium.

“From the bank’s perspective, allowing interest-free cash withdrawals could be a good way to get more people to sign up for the card. But since they have stopped such transactions under covid, they realize that this is a high risk area and they would not want to expose their book to income shocks under the pandemic, ”said Parijat Garg, independent consultant for digital loans and old credit. office official.

Garg added that from the customer’s point of view, care should be taken in using the interest free cashout feature. If the customer doesn’t realize the pitfalls of withdrawing money and not meeting the 50-day repayment deadline, it could end up being the door of a debt trap, he said.

Harshvardhan Roongta, CFP and co-founder of Roongta Securities, agrees.

“Unless a customer is sure to repay their dues within 50 days, they should ideally not be withdrawing money from their credit card account,” Roongta said. “Typically, this would be viewed as risky behavior on the part of the client, which could affect future borrowing.”

Macquarie acknowledged that the cash advance market is growing and is driving fee income as a result. “In FY20, the industry recorded over 10 million (1 crore) of short-term cash advance transactions totaling nearly 50 billion rupees (5,000 crore rupees). While these numbers seem low, the fees are high! “

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