One in six credit card holders drowns in debt

At least one in six Sri Lankan credit card holders is grappling under a mountain of credit card debt which has risen to unbearable amounts making it difficult for them to repay with their meagre earnings, a recent research report of a banking sector professional group has revealed.

Debt-ridden credit card owners paying very high interest rate of 32 per cent and hidden charges tend to default as they are unable to even make the minimum payment regularly owing to financial constraints under the present economic situation, the report observed.

The credit card is normally used to make payment for purchases without carrying cash or withdraw money for urgent requirements.

This business operates predominantly on interest but if the interest is very high, cardholders will find it difficult to repay the debt due to high cost of living.

People tend to make payments for goods and services using a credit card rather than in cash and it has become a status symbol in Sri Lanka, the manager of a Bank of Ceylon branch located in the Colombo suburbs told the Business Times.

He added that using two or three cards has become a fashion at present and this trend has grown to unstoppable propositions with the vigorous promotional campaigns of banks and some finance companies such as LOLC, CDB and Singer.

Commercial banks had increased the annual interest rate on credit cards up to 32 per cent recently. Senior Deputy Governor of the Central Bank ( CB) Nandalal Weerasinghe noted that customers would not be attracted to lending instruments such as credit cards due to high interest rates.

The CB will be imposing a cap on interest rates if the banks fail to reduce interest rates on lending or borrowings of customers, he added.

According to the latest statistics released by the CB, the total credit card outstanding balance issued by the banking and financial institutions of Sri Lanka was reported at Rs.110.27 billion, at the end of April 2019.

This is an increase of Rs.2.29 billion from the previous month’sbalance of Rs.107.97 billion.

Considering the high nominal and real interest rates on deposit and lending products, the CB has imposed maximum interest rates on deposit products in April 2019, thus reducing the cost of funds of financial institutions, enabling them to reduce lending rates and enhance credit flows to the real economy, a recent monetary policy review revealed.