Friday, May 8, 2009

The US and Indian Rate Difference

The US and Indian economy differ on almost all economic parameters. And US comes on top in all, except fiscal deficit and BOP. Clearly, the advantage they have enjoyed due to technological break-through has propelled their economy for long.

All this implies that US citizens have seen development in all spheres of life at much faster rate than their counterparts in most parts of the globe.

So there is no harm in me saying that the loan market or "the credit market" is much more developed in US and it has a higher penetration per capital, when compared to India.

Now in such a developed market, the competition becomes real tough. Companies cut their margins to woo customers and keep their bottom line in blue!!

However, how safe is it to offer Low Interest Credit Cards in these troubled time? When banks are going bust, How can one trust an Individual?

Well, to start of with, these cards are not being issued to everyone on the New York street. The Bankers are smart chaps. They are issuing these cards to only those customers who are having a record of paying back. Either in full or in part. So what effectively is happening , is that the customers are moving from their existing cards, that are charging higher rates, to the Low Interest Cards.

These customers have all the intention to pay the amount. Like anyone, they just want to pay less interest. And therefore, they move. From a bankers perspective, its a RELATIVELY less risky proposition to issue a card to someone who is willing to pay at lower charges, than to issue it to someone at higher charges who has a higher probability of defaulting in the current scenario.

Also the main income for card issuers come from the transaction fees that they charge to the merchants and not from the interest income. So the fall in the interest rates should not make that big an impact in the P&L of the banks.

The Indian Market has a different scene altogether!! The Indians are not too much into banking, and therefore the cards penetration remain at a very low percent when looked at overall population. Therefore, the potential is still huge in our country. And this is the reason for higher interest charges in India.


Pradeep Melchis said...

Nice info man!!! Then it brings me to one more question. Isn't the ordinary American overly dependent on credit card!! I have heard instances where people even with very little income spend so much using plastic. Well then, in times such as these, this should bring a great liquidity crunch to their whole system as such!!

Pradeep Melchis said...

Which then would require much more than what the FED is doing right now to bring in liquidity to the system... Or do you feel the current measures will show some "green shoots" with a lag.. Your take on this!! I know, a proper answer is anybody's guess, but still ur take on this would be gr8!! Hope am not bugging you!! :)