STUDY ON THE USAGE OF CREDIT CARD IN INDIA Dissertation Submitted to the Padmashree Dr. D.Y. Patil University in partial fulfillment of the requirements for the award of the Degree of MASTERS IN BUSINESS ADMINISTRATION Submitted by:ANKIT BHANGADIYA

(Roll No. 09132)

Research Guide Ms. Smriti Alva Lecturer

Department of Business ManagementPadmashree Dr. D.Y. Patil University CBD Belapur, Navi Mumbai

February 20111 |Page

DECLARATION I hereby declare that the dissertation Study on the usage of credit card in India submitted for the MBA Degree at Padmashree Dr. D.Y. Patil Universitys Department of Business Management is my original work and the dissertation has not formed the basis for the award of any degree, associate ship, fellowship or any other similar titles.

Place: Mumbai Date:

Signature of the Student

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CERTIFICATE

This is to certify that the dissertation entitled Study on the usage of credit card in India is the bona fide research work carried out by Mr. Ankit Bhangadiya student of MBA, at Padmashree Dr. D.Y. Patil Universitys Department of Business Management during the year 2009-2011, in partial fulfillment of the requirements for the award of the Degree of Master in Business Management and that the dissertation has not formed the basis for the award previously of any degree, diploma, associateship, fellowship or any other similar title.

__________________ (Ms. Smriti Alva)

__________________ (Dr. R. Gopal, Director, Department of Business Management, Padmashree Dr. D.Y. Patil University)

Place: Mumbai Date:

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PREFACE While searching for a suitable topic for the MBA Dissertation, I happened to meet a person from the Finance Sector, who suggested to me the topic on the Banking Sector of India. During the course of the discussion, it transpired that the problem that this sector faces is with respect to Credit card usage in India. The topics having aroused my curiosity, discussions were held with several people in the retail sector to understand the veracity of the above thought process and also understand the real issues plaguing the industry.

All these aspects then resulted in the development of the project report titled STUDY ON THE USAGE OF CREDIT CARD IN INDIA

It is strongly hoped that this project covers not only the various requirements of the Project Study but also of the Industry.

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ACKNOWLEDGEMENT

In the first place, I thank the Padmashree Dr. D. Y. Patil University, Department of Business Management, Navi Mumbai for giving me an opportunity to work on this project. I would also like to thank Ms. Smriti Alva, Lecturer, Department of Business Management, Padmashree Dr. D.Y. Patil University, Navi Mumbai for giving me her valuable guidance for the project. Without her help it would have been impossible for me to complete the project. I would also like to thank the various people from the Banking industry who have provided me with a lot of information and in fact even sharing some of the confidential company documents and data many of which I have used in this report and without which this project could not have been completed. I would be failing in my duty if I do not acknowledge with a deep sense of gratitude the sacrifices made by my parents and thus have helped me in completing the project work successfully.

Place: Mumbai Date: Signature of the student

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1. EXECUTIVE SUMMARY

Credit cards provide benefits to consumers and merchants not provided by other payment instruments as evidenced by their explosive growth in the number and value of transactions over the last 20 years. Recently, credit card networks have come under scrutiny from regulators and antitrust authorities around the world. Focusing on interrelated bilateral transactions, several theoretical models have been constructed to study the implications of several business practices of credit card networks. Suggestions for future research are also discussed. The phenomenal growth witnessed globally in the 20 th century in the manufacturing industries sector helped fulfill mans physiological needs like food, shelter and clothing in a big way. Increasing demand for satisfaction of these needs engineered the proliferation of companies involved in their manufacture of variations to the same product. Simultaneously, economic, social, cultural and technological development of society led to the growth of the service industry. Further, society also exhibited increasing affluence combined with growing complexity of life. The world- wide boom witnessed in the consumer, Credit card only marked the beginning of the new era of banking and financed system. It has also become a practice among the trading firm to extend liberal credit to customers.

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2. OBJECTIVES OF THE STUDY

The primary objective of the report is categorized into following subtopics:

1. To study the demographic factors of credit card holders.

2. To study the utility of credit card by the holders.

3. To assess the behavioral changes of credit card holders.

4. To study the satisfaction level of existing credit card holders.

5. To suggest measures to improve the credit card system in India.

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3. RESEARCH METHODOLOGY The study is based on primary data, which has been collected from the credit card users with the help of a well drafted and structured questionnaire. For the collection of primary data, we have confined ourselves to Panvel, India. Our sample consists of a total of 150 respondents. The respondents are basically credit card users, who have been selected by following the nonprobabilistic sampling, simple purposive sampling and convenience sampling techniques. Further, it is essential to mention two things: Firstly, in convenience-sampling, respondents (who were seen using/have possession of credit cards) were selected because they happened to be in the right place at the right time and Secondly, convenience sampling technique is not recommended for descriptive or casual research, but they can be used in exploratory research for the generation of ideas. In addition, the respondents had to rate the credit cards according to the importance, on the `five-point Likert scale.

Research Problem

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The main purpose of the project is to understand the usage of credit card by the holders according to demographic factors, their utility purpose and their satisfaction level.

Sampling Plan Target Population: Credit Card holders Sample Size: 150 respondents of Panvel City Sampling technique: Convenience sampling Data sources Primary sources Primary data has been collected through the structured

questionnaire consisting mainly of the closed ended questions. Secondary sources Secondary data has been collected from the internet, journals, reference books etc.

Research Design The research design that has been used is Descriptive Research. Involves gathering data that describe events and then organizes, tabulates, depicts, and describes the data.9 |Page

Uses description as a tool to organize data into patterns that emerge during analysis. Often uses visual aids such as graphs and charts to aid the reader. The methods used for this research would be mainly by the response to the questionnaire by the credit card holders. 4. LITERATURE REVIEW INDIAN SCENARIO: The first credit card to enter India was the diners club card in the year 1964. The first Indian banks to launch credit cards were Andhra bank was VISA classic in the year 1981, followed by central bank of Indias credit card in collaboration with Master Card Corporation in the same year. The other nationalized banks, canara banks, bank of India, and bank of Baroda, etc. gradually introduced their credit cards in India only later. Apart from these Indian banks, many foreign banks such as citi bank, standard chartered bank, ANZ Grindlays bank, bank of America and American express bank have also introduced their proprietary and other franchised cards through their Indian branches. Citibank issues diners club card, Andhra bank now offers four types of credit cards for different categories of people, including the VISA ICC card for international usage. Similarly, Canara bank has a range of cards, from their proprietary cancard to franchised cards such as cancard visa, cancard master, and VISA international gold cards, etc., bank of Baroda has started its BOBCARD master, and developed to BOBCARD (global). Today, this bank issues 4 types of credit cards. The bank issues regular card, international card, ATM card and very recently, the ATM-cum-debit card. There are about 12 major banks, both foreign and Indian, which currently provide cards in India. Many other banks, such as Indian Overseas Bank, Dena Bank, Corporation Bank, and Vysya Bank have affiliations with the10 | P a g e

principal issuers like Canara Bank, Citibank, Bank of India, etc., for issuing credit cards using the brand name of the original issuers. The card industry in India is poised for big growth, thanks to the technology revolution that is taking place. The Reserve Bank of India is taking special measures to promote the use of alternate payment systems like credit cards, debit cards, etc. to ease the pressure on currency printing and the use of cheques. On the legal front too, the developments in India are becoming favorable to the card industry. Banks can now file summary suits against defaulters for quicker recovery of credit card dues. This has made an increasing number of Indian banks realize the credit card potential and spurred them to enter the ever-expanding card business. Prepaid/stored value cards are also gaining popularity in the Indian market. For instance, oil companies issue petrocards for easier payment at the companys petrol stations. Similarly, the Mahanagar Telephone Nigam Limited (MTNL) has already introduced its virtual calling card and has recently launched a co-branded telecom credit card to facilitate payment of telephone bills. Credit card lending has surged to such an extent that average loan amounts ($32,400 in 2004) made to small businesses with revenues greater than $1 million were actually smaller than average loan amounts ($42,600) made to the smallest businesses with revenues under $1 million12. The larger small businesses are receiving a greater portion of credit card loans than the smallest small businesses. Some Indian banks have made an entry into the smart card business too. However, a further thrust in these areas will come only with operational experience and also by having greater clarity on payment modes and their implications for policy conduct. The Reserve bank of India (RBI) has formed a working group in the Department on the smart rupees system (smars) project, undertaken by IIT-Mumbai. Some of the banks are planning to launch WAP based mobile banking services. The service will provide information such as online balance updates and details of the last five transactions, besides accepting11 | P a g e

requests for cheque books and statements. Such a service aims at providing specialized services such as fund transfer, bill payment , shopping facilities, investment advisory, etc.

Sujit Chakravorti Federal Reserve Bank of Chicago - Research Department

Beneficiaries of the Study 1. Banks Banks may come to know about the usage pattern of the credit card holders based on the demographics, purposes and consumption pattern and may aim to target new customers based on the derived facts. 2. Probable subscribers New prospects may find it helpful in selecting the credit card company and the bank issuing the credit based on the satisfaction level of the existing credit card holders. 3. Researchers Study gives the researchers the insight about the credit card system prevailing and the usage pattern and satisfaction level of the existing credit card holders.

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Scope of the study All the questions have been analyzed by adding up the responses against each alternative and answers from the various respondents. The collected data has been subject to statistical analysis to draw inferences and suitable conclusions. Statistical tools like chi-square and percentage are used. For calculating the table value for analysis with chi-square, 5% significance level is used.

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5. LIMITATION OF THE STUDY

1. The study is confined to the city of Panvel only.

2. The respondents were generally co-operative, yet some of them might have biased their reply for certain sensitive questions.

3. The duration of the study is also in accordance with the academic objective of the course curriculum. So in pursuit of academic exercise, the restriction on time has also brought into study some limitations.

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CHAPTERIZATION Chapter No A B C 1 2 3 4 5 6 List of Tables List of Figures List of Abbreviations Executive Summary Objective of the Study Research Methodology Review of Literature Limitation of the Study Banking Industry in India - A perspective 6.1 Introduction 6.2 Government Initiatives 6.3 Banks initiative 6.4 Current Banking Scenario15 | P a g e

Title

Pag e No

6.5 Growth of Banking Sector 6.6 Growth of Banks 7 Introduction to Credit card 7.1 Definition and Concept of Credit card 7.2 Features of Credit Card 7.3 Facilities and Services 7.4 Classification of Credit Card Credit Card Transaction Process and Parties 7.5 Involved in it. 7.6 Advantages and Disadvantages of Credit Card 8 Introduction to Credit Card Industry 8.1 History 8.2 Credit card Industry in India 8.3 Statistics and Projections of Credit card Industry 8.4 Credit Card Operations of Bank- Guidelines 8.5 Credit card market in India 8.6 Credit Card Frauds 9 10 11 12 13 12.1 Credit Card Industry Analysis- Porters 5 Forces Analysis and Interpretation of Data Finding and Suggestions Conclusion Reference Section Questionnaire

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12.2 12.3

Bibliography SPSS Output

6. BANKING INDUSTRY IN INDIA A PERSPECTIVE

6.1 Introduction

Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980. The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co17 | P a g e

operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 67,000 branches spread across the country. The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold. After the second phase of financial sector reforms and

liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services.18 | P a g e

During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks accounted for 53.2 percent of the deposits and 47.5 percent of credit during the same period. The share of foreign banks (numbering 42), regional rural banks and other scheduled commercial banks accounted for 5.7 percent, 3.9 percent and 12.2 percent respectively in deposits and 8.41 percent, 3.14 percent and 12.85 percent respectively in credit during the year 2000.

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6.2 Government initiatives The Cabinet, on December 1, 2010 approved to provide an additional amount of US$ 1.33 billion, in addition to the US$ 3.32 billion already provided in the Budget 2010-11, to ensure Tier I CRAR (Capital to Risk Weighted Assets) of all Public Sector Banks (PSBs) at 7 per cent and also to raise Government of India holding in all PSBs to 58 per cent. It also approved that the exact amount, mode of capitalization and other terms and conditions would be decided in consultation with the banks at the time of infusion. The proposed capital infusion would enhance the lending capacity of the PSBs to meet the credit requirement of the economy in order to maintain and accelerate the economic growth momentum. The RBI has allowed banks to make changes in the repayment schedules or drawdown without prior approval from the central bank. However, such a change could be made on the condition that the average maturity of the loan should remain the same. The move is expected to make external commercial borrowing (ECB) transactions easier. Transactions both through automatic and approval routes can take advantage of this change. Now, without the prior approval of RBI, Indian companies may borrow up to US$ 500 million in a year.20 | P a g e

As part of further liberalization of the extant branch licensing policy in respect of regional rural banks (RRBs), they have been permitted to open branches in Tier 3 to Tier 6 centres (with population up to 49,999 as per Census 2001) without the Reserve Bank's prior authorization provided

The capital to risk-weighted assets ratio (CRAR) is at least 9 per cent; The net non-performing assets (NPAs) are less than 5 per cent; They have not defaulted in the maintenance of cash reserve ratio (CRR)/statutory liquidity ratio (SLR) during the last year; and They have earned a net profit in the last financial year. On the lending side, the Base Rate system replaced the Benchmark Prime Lending Rate (BPLR) system with effect from July 1, 2010. Base Rates of scheduled commercial banks (SCBs) were fixed in the range of 5.50-9.00 per cent. Subsequently, several banks reviewed and increased their Base Rates in the range of 1050 basis points by October 2010. Base Rates of major banks, accounting for over 94 per cent in total bank credit, are in the range of 7.50-8.50 per cent. Banks have also raised their BPLRs in the range of 25-75 basis points for their old loans. As at end-July 2010, around 70,000 branches of 98 banks had participated in the national electronic funds transfer (NEFT) system and the volume of transactions processed increased to 9.5 million in July 2010. The repo rate and the reverse repo rate under the liquidity adjustment facility (LAF) have been increased since November 2, 2010 as under: The repo rate has been raised by 25 basis points from 6.0 per cent to 6.25 per cent with immediate effect. The reverse repo rate has been raised by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect.

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The cash reserve ratio (CRR) of scheduled banks has been retained at 6.0 per cent of their net demand and time liabilities (NDTL). Meanwhile, outstanding bank credit in the 15 days up to October 8, 2010 rose by US$ 10.56 billion to US$ 784.58 billion, according to scheduled banks' statement of position released by the RBI. On a year-on-year basis, credit has grown at more than 20 per cent till date, the RBI data showed.

6.3 Bank initiatives Since December 2008, the government has announced series of measures to augment flow of credits to around US$ 2, 66,274 to SMEs. To improve the flow of credit to industrial clusters and facilitate their overall development, 15 banks operating in Orissa including the public sector State Bank of India (SBI) and the Small Industries Development Bank of India (SIDBI) have adopted 48 clusters specially in sectors like engineering tools, foundry, handloom, food processing, weaving, rice mill, cashew processing, pharmaceuticals, bell metals and carpentry etc. PSBs are now cashing in the auto loan segment after the exit of private players owing to the slowdown. Auto loans usually have three components - car loans, two-wheeler loans and commercial vehicle loans. PSBs are primarily focusing on car and two-wheeler loans. Prevalent interest rates in the car loan segment now range between 11 per cent and 12.5 per cent per annum. For instance, according to the Union Bank of India Chairman and Managing Director, MV Nair, his bank had recently tied up with Maruti Suzuki22 | P a g e

India for financing the latter's product and it has a US$ 163.84 million auto loan portfolio. The government has told public sector banks (PSBs) to extend credit to fund-starved Indian industry, especially exporters and small and medium sector enterprises to address their credit needs. SIDBI would be lending US$ 1.33 billion out of US$ 1.47 billion credit from RBI to public sector banks. This is being provided to the PSBs at 6.5 per cent (SIDBI is getting the credit at 5.5 per cent) under the condition that the banks will have to lend this credit to the medium and small-scale industry units at an interest rate of 10 per cent before March 31, 2010. According to SBI Chairman, O P Bhatt, contribution of small and medium enterprises (SMEs) is nearly 40-50 per cent to GDP growth of the nation, and this sector also accounts for 50 per cent of the industrial output. "Banks could accrue revenue of over US$ 5.73 billion by encouraging the SMEs," Bhatt said adding, "SME's sector is to grow fastest in the next five years, with 14 per cent growth in terms of revenue and 13 per cent in terms of profits." The bank in order to help units tide over the current downturn, had introduced products like SME Care specially in Jharkhand, which provides units to access 20 per cent additional funds over and above their existing overdraft limit. Already, according to an official, the MSME ministry has proposed to RBI that the sector be given a mandatory 15 per cent share of the total priority sector lending. The banking industry is thereby now lending both strength23 | P a g e

and support in form of cash and policies majorly in putting back the economy into track.

6.4 Current Banking scenario The industry is currently in a transition phase. On the one hand, the PSBs, which are the mainstay of the Indian Banking system, are in the process of shedding their flab in terms of excessive manpower, excessive non Performing Assets (NPAs) and excessive governmental equity, while on the other hand the private sector banks are consolidating themselves through mergers and acquisitions. PSBs, which currently account for more than 78 % of total banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues from traditional sources, lack of modern technology and a massive workforce while the new private sector banks are forging ahead and rewriting the traditional banking business model by way of their sheer innovation and service. The PSBs are of course currently working out challenging strategies even as 20 percent of their massive employee strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS) schemes.

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The private players however cannot match the PSBs great reach, great size and access to low cost deposits. Therefore one of the means for them to combat the PSBs has been through the merger and acquisition (M& A) route. Over the last two years, the industry has witnessed several such instances. For instance, Hdfc Banks merger with Times Bank, Icici Banks acquisition of ITC Classic, Anagram Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the lookout. The UTI bank- Global Trust Bank merger however opened a Pandoras box and brought about the realization that all was not well in the functioning of many of the private sector banks. Private sector Banks have pioneered internet banking, phone banking, anywhere banking, and mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other services and integrated them into the mainstream banking arena, while the PSBs are still grappling with disgruntled employees in the aftermath of successful VRS schemes. The Indian banking industry is currently termed as strong, having weathered the global economic slowdown and showing good numbers with strong support flowing in from the Reserve Bank of India (RBI) measures. Furthermore, a report "Opportunities in Indian Banking Sector", by market research company, RNCOS, forecasts that the Indian banking sector will grow at a healthy compound annual growth rate (CAGR) of around 23.3 per cent till 2011. Banking, financial services and insurance (BFSI), together account for 38 per cent of India's outsourcing industry (worth US$ 47.8 billion in 2007). According to a report by McKinsey and NASSCOM, India has the potential to process 30 per cent of the banking transactions in the25 | P a g e

US by the year 2010. Outsourcing by the BFSI to India is expected to grow at an annual rate of 3035 per cent. According to a study by Dun & Bradstreet (an international research body) "India's Top Banks 2008"there has been a significant growth in the banking infrastructure. Taking into account all banks in India, there are overall 56,640 branches or offices, 893,356 employees and 27,088 ATMs. Public sector banks made up a large chunk of the infrastructure, with 87.7 per cent of all offices, 82 per cent of staff and 60.3 per cent of all ATMs. According to the RBI, Indian financial markets have generally remained orderly during 2008-09. In view of the tight liquidity conditions in the domestic money markets in September 2008, the Reserve Bank announced a series of measures beginning September 16, 2008. Thus, the average call rate which was at 10.52 per cent declined to 7.57 per cent in November 2008 under the impact of these measures. Measures aimed at expanding the rupee liquidity, included significant reduction in the cash reserve ratio (CRR), reduction of the statutory liquidity ratio (SLR), opening a special repo window under the liquidity adjustment facility (LAF) for banks for on-lending to the non-banking financial companies (NBFCs), housing finance companies (HFCs) and mutual funds (MFs), and extending a special refinance facility, which banks could access without any collateral. The reserve money lying with the RBI as on November 21, 2008 as per the January 2009 bulletin, is a total amount of US$ 179.28 billion and RBIs credit to the commercial sector stood at US$ 3.65 billion. Further, banks in26 | P a g e

India put up strong growth and profit numbers in the October-endDecember 2008 period owing to high credit growth and easing of yield on government bonds. Top Indian banks have increased their earnings by almost 40 per cent year-on-year for the same period. According to latest Reserve Bank of India (RBI) data, bank credit grew by 24.6 per cent yearon-year as of December 19, 2008. The resulting credit growth was even better at 41 per cent during the April-end-December 2008 period. Deposits grew by 20.6 per cent as of December 19, 2008. The growth in advances reflects that the net interest income (NIM) too would indicate higher growth rate. RBI has taken a number of steps to lower the cost of credit in this quarter like cutting cash reserve ratio (CRR), the amount of funds banks have to keep on deposit with it, repo and reverse repo rate. The CRR rate, which had been reduced in December 2008, to 5.50 per cent, repo rate to 6.50 and reverse repo rate to 5.00, were further reduced CRR to 5 per cent, (its lending rate) repo rate to 5.5 per cent and reverse repo, at which it absorbs cash from the banking system, to 4 per cent in January 2009.

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6.5 Growth of Banking Sector An analysis of Indian Banking sector include the Growth in advances and deposits, Market share, NPAs, CAR, Exposure norms, Retail Banking Initiatives and Major Players. The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in the whole financial sector. The banking sector is dominated by Scheduled Commercial Banks (SCBs). As at end-March 2002, there were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks consisting of 51 scheduled urban co-operative banks and 16 scheduled state co-operative banks. Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18% registered in the previous year. And on advances, the growth was 14.5%against 17.3 % of the earlier year. State Bank of India is still the largest bank in India with the market share of 20%. Icici and its two subsidiaries merged with Icici Bank,

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leading creating the second largest bank in India with a balance sheet size of Rs1040bn. Retail Banking is the new mantra in the banking sector. The home loans alone account for nearly two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is expected to grow at 30-40% in the coming years. Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words that banks are using to lure customers. With a view to provide an institutional mechanism for sharing of information on borrowers/ potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd. (Cibil) was set up in August 2000. The Bureau provides a framework for collecting, processing and sharing credit information on borrowers of credit institutions. SBI and Hdfc are the promoters of the Cibil. The RBI is now planning to transfer of its stakes in the SBI, NHB and National Bank for Agricultural and Rural Development to the private players. Also, the Government has sought to lower its holding in PSBs to a minimum of 33 per cent of total capital by allowing them to raise capital from the market. Banks are free to acquire shares, convertible debentures of corporate and units of equity-oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including Commercial Paper) as on March 31 of the previous year. The finance ministry spelt out structure of the government-sponsored ARC called the Asset Reconstruction Company (India) Limited (Arcil),29 | P a g e

this pilot project of the ministry would pave way for smoother functioning of the credit market in the country. The Government will hold 49% stake and private players will hold the rest 51% - the majority being held by ICICI Bank (24.5%).

6.6 Growth of Banks HDFC Bank and Axis Bank continue to remain as leaders of the private sector banks. Both the banks have maintained the advances growth and NIM. SBI, Punjab National Bank, Bank of India and Union Bank are expected to lead among PSU Banks. The State Bank of India is planning to open 1,000 new branches across the country to cover 100,000 villages in the coming FY 2009-10, according to the bank Chairman, Mr. O P Bhatt. The bank had decided to rope in 300 new customers every year for each branch using initiatives. According to Mr. Bhatt, the bank could get a record US$ 5.54 billion during December 2008, the highest amount collected by any bank in the country. Further, public sector banks (PSBs) on January 12, 2009 also decided to lower interest rates on bulk deposits and to offer a maximum rate of 7.5 per cent for one-year maturity. Earlier, on January 1, banks had lowered the interest rates on bulk deposits from 9.5 per cent to 8.5 per cent. According to the latest RBI data, growth in broad money (M3), year-on-year (y-o-y), was 19.6 per cent (US$ 151.04 billion) on January 2, 2009 lower than 22.6 per cent (US$ 141.82 billion) a year ago. Aggregate deposits of banks,

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year-on-year, expanded 20.2 per cent (US$ 133.08 billion) on January 2, 2009 as compared with 24.0 per cent (US$ 127.49 billion) a year ago. The growth in bank credit continued to remain high. Non-food credit by scheduled commercial banks (SCBs) was 23.9 per cent (US$ 102.78 billion), year-on-year, as on January 2, 2009 from 22.0 per cent (US$ 77.79 billion) a year ago. Scheduled commercial banks credit to the commercial sector expanded by 27.0 per cent (year-on-year) as on November 21, 2008, as compared with 23.1 per cent a year ago. Non-food credit of scheduled commercial banks expanded by 26.9 per cent, year-on-year, as on November 21, 2008, higher than 23.7 per cent a year ago. According to earlier RBI data, for the third quarter (September 26December 27, 2008), total bank credit was up US$ 21.91 billion compared with a growth of US$ 22.91 billion in the same period a year ago. In the preceding quarter, credit had risen by US$ 26.50 billion. RBI data for deposits shows that for the Oct-end December 31, 2008 period, although deposit growth has slowed to US$ 25.99 billion against US$ 33.18 billion in the April-end to September, 2008 period, it was still stronger in the December 31 quarter period, 2008, as compared to the year-ago quarter when absolute growth was US$ 16.37 billion. Net banking capital amounted to US$ 4.8 billion in April-September 2008 as compared with US$ 5.7 billion in April-September 2007. Accounting for a part of banking capital, non-resident Indian (NRI) deposits showed a net inflow of US $ 1.1 billion in April-September 2008, increasing from net outflow of US$ 78 million in April-September 2007.31 | P a g e

Lending by banks also rose more than 76 per cent to Rs 2,80,000 crore (US$ 57.26 billion) during April-November 2008-09 from the same period a year ago, according to data available with the Reserve Bank of India (RBI). The Reserve Bank of India on January 21, 2009 fixed the Reference rate for the US currency at Rs 48.93 per dollar and the single European unit at Rs 63.70 per euro from Rs 49.12 per dollar and Rs 63.61 per euro, respectively.

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7. INTRODUCTION TO CREDIT CARD 7.1 Definition and Concept of credit card Definition A credit card is a credit-token within the meaning of section 14(1), Consumer Credit Act 1974 of the UK which defines a credit-token as a card, cheque, voucher, coupon, stamp, form booklet or other document or thing given to an individual by a person carrying on a consumer credit business, who undertakes:- that on the production of it (whether or not some other action is also required), he will supply, cash, goods and services (or any of them) on credit, or that were, on the production of it to third party (whether or not any other action is also required), the third party supplies cash, goods and services (whether or not deducting any discount or commission), in return for payment to him by the individual. In very simple words credit card can be termed as an unsecured personal loan offered to customers by the banks where the card-holder could purchase goods and services from authorized merchant or merchant establishments (MEs) of the bank up to a fixed limit on credit. Such credit is normally made available for a period of 30 to 45 days. This is turn helps earn income by way of commission from its merchant

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establishments; the scheme provided large scope for sale and increased turnover with assured and prompt payment. A credit card allows consumers to purchase products or services without cash and to pay for them at a later date. To qualify for this type of credit, the consumer must open an account with a bank or company, which sponsors a card. They then receive a line of credit with a specified dollar amount. They can use the card to make purchases from participating merchants until they reach this credit limit. Every month the sponsor provides a bill, which tallies the card activity during the previous 30 days. Depending on the terms of the card, the customer may pay interest charges on the amount that they do not pay for on a monthly basis. Also, credit cards may be sponsored by large retailers (such as major clothing or department stores) or by banks or corporations (like VISA or American Express). Concept Progress in civilization in its turn has brought out radical changes in the manner of trading. The need for something intrinsically useful and easily applicable in everyday dealing is clearly felt. Cash in the form of currency notes and coins makes up just one form of the payment system. Development in banking while also giving inputs to the further development of cash brought about a second phase in payment namely paper instructions such as cheques and credit transfers. The requirement for greater flexibility and convenience has led to electronic payments, and this is where plastic cards have proved their worth. It34 | P a g e

allows the card issuers to limit the sum of money the card-holders wish to spend. The credit of card-holders who have defaulted on payments or who are over their credit limit can be restricted until the balances are cleared.

7.2 FEATURES OF CREDIT CARD Any card that is used as a payment device to access a customer's financial resources is referred to as a credit card. The card may be used during travel, home, for purchases or at the Automated Teller Machines (ATMs) for credit or debit transactions. It is also known as "plastic money and it can be used for the purchase of all kinds of goods and services. Following are the salient features of the modern credit card: Fees and Charges The saying "there's no such thing as a free lunch" is particularly true when it comes to credit cards. So, find exactly what fees you're likely to be paying, and if it's possible to avoid them. For example, you may avoid paying interest if you pay the balance off in full each month. Annual Fee When the credit card companies realized that some people really could be disciplined and pay off their balance each month, they discovered they didn't make any money. So then came the annual fee - basically to make sure you pay them something for the use of their card. The good news is that with the credit card market being so competitive, you can often negotiate to have this fee removed. Cash Advance Fee Nearly every credit card company will charge you a cash advance fee. Be warned - some of them charge some very hefty cash advance fees.35 | P a g e

Wide Usage: Bank credit is the most widely used payment device issued by banks. It is based on the system of revolving credit whereby a credit limit is sanctioned to the customer and can be availed in part or in full. Once the outstanding balance is paid, the credit limit is restored for further use. The credit card holders can use the credit cards at merchant locations to buy goods or services. Special credit cards can also be used to obtain cash through ATM's. Going by their popularity all over the world, credit cards have been a runaway success. Owner Identification: A credit card identifies its owner as the one who is entitled to purchase goods and services without physical money and is eligible for credit from establishments. Credit Limit: The issuer, for the purpose of convenience and scrutiny, sets up a credit limit for its cardholders and a floor limit for its merchants establishments. The convenience and safety factors add value to these cards. Technology Dependent: The credit card business is typically a high volume low value business, with the potential to break-even only beyond a certain volume of cards issued, the dependence on technology is inevitable to keep the operating cost to the minimum Other Fees Credit companies are very good at coming up with fees for almost everything, so check the fine print and make sure you know what they are. Some things to look out for include over-the-limit fees, late-payment fees, return-item fees and set-up fees. Mostly these can be avoided by careful management, but it's still handy to be prepared if you ever get charged one.36 | P a g e

7.3 FACILITIES AND SERVICES: Besides providing credit, the credit card organizations extend some additional facilities to attract customers. Some of these facilities offered by banks are explained below: Risk Coverage Depending on the type of card issued, some banks insure the cardholder free of cost for a particular sum. For example, Citibank offers a complimentary personal accident insurance upto Rs.10lakhs in case of an air accident and upto Rs.2 lakhs in case of any other accident. Similarly, the BOB card issued by the bank of Baroda extends insurance protection to the cardholders spouse also. It not only insures the cardholder against personal accident to the tune of Rs.10lakhs in case of air travel, or Rs.5lakhs in case of any other accident, but also gives the benefit of personal accident cover even to a non-card holding spouse to the tune of Rs.2lakhs. Twenty four hour service The revolutionary phone banking service ensures that the banks extend 24 hour customer service to assist the cardholder, all seven days a week. For example, SBI card help line available for SBI cardholders is of great help to cardholders and provides a variety of information required by customers. Supplementary cards Supplementary cards are issued to the family members of cardholders. A cardholder of any bank can obtain a maximum of two supplementary cards at the prevailing card fee for the immediate family members.

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Photo card Option Credit cards are now being issued with the photograph and signature of the cardholder digitally imprinted on the front of the card. These cards offer easier recognition and extra security.

Travel privileges Banks provide travel assistance to their cardholders by offering a wide range of services linked to airline and hotel bookings, discounted holiday packages, car rentals and more. For example, Bank of Baroda has entered into a tie-up with I.T.C for travel privileges to its customers. Service over phone Credit cardholders of selected banks can use their cards to pay for personal expenses where credit cards are not yet accepted. This is possible by instructing the bank over the phone to make payments for mutual funds, public issues, HP down payments, and paying telephone and electricity bills, besides issue of drafts. Purchase protection This facility protects the purchaser against damage or loss caused due to fire and theft at no extra cost. The cardholder can claim the value of the product damaged or lost from the New India Assurance Company. This protection is available for a period of ninety days from the date of purchase of the product using the card. Emergency cash withdrawal Citibank cardholders can withdraw emergency cash of upto 60 percent of the credit limit from ATMs in all leading metropolitan cities. The Indian Bank, however does not restrict cash withdrawing power only to a few automated and/or metropolitan locations, but allows cash withdrawals from all notified branches of the Indian Bank across the country. Medical advance facility

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Cardholders can draw upto Rs.15000 in case of medical emergencies for meeting expenses on treatment at locations other than their home town. This facility is available with all Indian and Foreign banks, depending on the type of card issued by the bank. For instance, standard chartered bank offers 10 to 20 percent discount on services at hospitals in leading cities across the country. This facility covers special rates on medical facilities, diagnostic tests, checks-ups, lab tests, nursing charges, and professional fees. 7.4 CLASSIFICATION OF CREDIT CARD 1. Based on mode of credit recovery: Revolving credit card:

This type of credit cards follows the revolving credit principle. A limit is set on the amount of money one can spend on the card for a particular period. The cardholder has to pay a minimum percentage of the outstanding credit which may vary from 5 to 10 percent at the end of a particular period. Interest varying from 30 to 36 percent per annum is charged on the outstanding amount. Charge card: a charge card is not a credit instrument .It is a convenient mode of making payment. This facility gives a consolidated bill for a specific period and bills are payable in full on presentation. There is no interest liability and no pre-set credit limits either. 2. Based on status of credit card: Standard card: Credit cards that are regularly issued by all cards issuing banks are called Standard cards. With these cards, it is possible for a cardholder to make purchases with put having to pay cash immediately. Its however; offers only limited privileges to cardholders. Some banks issue standard cards under the brand name Classic cards. These cards are generally issued to salaried people.

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Business card: Business cards, also known as executive cards, are issued to small partnership firms, solicitors, firms of chartered accountants, tax-consultants and others, for use by executives on their business trips. The card enjoys higher credit limits and more privileges than the standard cards. These cards are issued in the names of the executives of the firms. Gold card: The gold card offers high value credit for the elite. It offers many additional benefits and facilities such as higher credit limits, more cash advance limits etc that are not available with standard or executive Cards.

. 3. Based on geographical validity: Domestic card: Cards that are valid only in India and Nepal are called domestic cards. All transactions will be in rupees. These cards are issued by most of the banks in India. International card: Credit cards that have international validity are called international cards. They are issued to people who travel abroad frequently. These cards are honored in every part of the world except India and Nepal. The cardholder can make purchases in foreign currencies subject to RBI sanction and FEMA rules and regulations. 4. Based on franchise/tie-up: Proprietary card: Cards that are issued by the banks themselves, without any tie-up, are called proprietary cards. A bank issues such cards under its own brand. Examples include SBI card, cancard of Canara bank, etc.

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Master card: This is a type of credit card issued under the umbrella of MasterCard international. The issuing bank has to obtain a franchise from the MasterCard Corporation of USA. The franchised cards will be honored in the MasterCard network.

Visa card: This is a type of credit card, which can be issued by any bank having tie-up with VISA international corporation, USA. The banks that issue Visa cards are said to have a franchise is that one can avail. the facility of the VISA network for transactions.

Domestic tie-up card: These are cards issued by a bank having a tie-up with domestic credit card brands such as cancard and indcard, etc. For example, Indian Overseas Bank has tie-up with cancard. These banks issue cards to users through the original banks. However, they can have their bank name engraved on the card. Credit is available on similar lines to the original card. 5. Based on the issuer category: Individual cards: These are the non-corporate credit cards that are issued to individuals. Generally all brands of credit cards issue individual cards. Corporate cards:

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These are credit cards issued to corporate and business firms. The executives and top officials of the firms use these cards. The card bears the name of the firm, and the bills are paid by the firm.

7.5 Credit Card Transaction process and Parties Involved Transaction Process When paying for purchases with a card, the transaction appears to happen almost instantaneously after the PIN is entered. However, there is a complex payments infrastructure behind the scenes making sure that the transaction is processed correctly. The following diagram sets out the steps, numbered from 1 to 8, in a card transactions payments cycle for a typical facetoface or card present transaction; there are five stakeholders in the process.

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Cardholder This is a person with a debit, credit or charge card issued to them by a financial institution. The cardholder may be asked to place their card into the chip and PIN reader (PIN pad or terminal) themselves, or hand the card to the merchant who will do this for them. Alternatively, if the card does not have a chip (only a magnetic stripe) or the merchant does not have a chip and PIN terminal, the merchant will swipe the card through the terminal or use a paper voucher. The customer will then key in their PIN, or sign, to indicate their agreement to proceed with the transaction. An authorization code will be given to the merchant for the transaction by the cardholders card issuer that will appear on the terminal receipt that is handed to the cardholder. The card issuer will debit the transaction to the cardholders account. Retailer / Merchant A merchant sells goods or services to their customer (the cardholder). This can be face-to-face in a shop on the high street, where both the cardholder and their card are present, or when taking orders remotely e.g. over the phone for a restaurant take away, a mail order from a catalogue, or a purchase over the internet. In this example, it is a card not present transaction. The card transactions details are entered into the merchants terminal, usually, sent via the telephone line to their acquiring bank who will process the transaction and send it on to the relevant card issuer for authorization and settlement. Acquirer A merchant will have negotiated a Merchant Service Agreement with their acquiring bank to process payment card transactions on their behalf. Typically, this agreement will also include the acquiring bank providing one of its own terminals, known as a bank owned terminal.43 | P a g e

An acquiring bank is responsible for receiving the card transaction details from the merchants terminal, passing these through to the card issuer (the cardholders bank or building society) via the card scheme for authorization and completing the processing of the transaction. An acquiring bank will arrange the card transactions settlement and will, typically, credit the merchants nominated bank account with the funds within four working days. An acquiring bank will also deal with any chargebacks or requests for information (RFI) that they may receive from card issuers on any of their merchants transaction Card Scheme Card Schemes are organizations who manage and control the operation and clearing of card payment transactions according to card scheme rules. The Card Schemes are responsible for passing card transaction details from the acquiring bank to the issuer and for passing payment back to the acquiring bank who in turn pays this to the merchant. American Express, Diners Club, JCB, Maestro, MasterCard and Visa (including Electron or Debit) are the card schemes that operate in the UK. Issuer The issuer is the bank, building society or financial organization that provides a payment card (debit, credit, pre-paid or charge card) to their customer or cardholder. The issuer has responsibility for transactions made on cards that they have issued, and will be responsible for debiting funds from the relevant cardholder's account. Note: For American Express and Diners Club - the transaction process is slightly different as they act as card scheme, issuer and acquiring44 | P a g e

bank at the same time. An acquiring bank will be able to explain more about accepting these card types.

Parties involved

Cardholder The owner of the card used to make a purchase; the consumer.

Card-issuing bank A Financial institution or any other organization which issue credit cards to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case.

Merchant The individual or business accepting credit card payments for products or services sold to the cardholder

Acquiring bank The financial institution which accept payment for the products or services on behalf of the merchant.

Independent sales organization Resellers (to merchants) of the services of the acquiring bank.

Merchant account provider This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.

Credit Card association

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An association of card-issuing banks such as Visa, MasterCard, Discover, American express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.

Transaction network The system that implements the mechanics of the electronic transactions, May be operated by an independent company, and one company may operate multiple networks. Transaction processing networks include: Cardnet, Nabanco, Omaha, Paymentech, NDC Atlanta, Nova, Vital, Concord EFSnet, and VisaNet.

Affinity partner Some institutions lend their name to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities and charities.

The flow of information and money between these parties always through the card associations is known as the interchange, and it consists of a few steps.

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SPECIMEN OF CREDIT CARD An example of the front in a typical credit card:

1. Issuing bank logo 2. EMV chip 3. Hologram 4. Credit card number 5. Card brand logo 6. Expiry Date 7. Cardholder's name An example of the reverse side of a typical credit card:

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1. Magnetic Stripe 2. Signature Strip 3. Card Security Code

7.6 Advantages and Disadvantages of Credit Card A credit card from VISA, MasterCard, or any other network allows you to pay for purchases or services by borrowing from the credit card company. You then repay by making monthly payments towards the amount borrowed. That is, you do not have to repay the whole borrowed amount in full at one go. Then there are charge cards, such as the American Express card, that require full payment of the borrowed amount each month. Either way, the credit card is a very convenient alternative to paying by cash. Essentially a credit card allows you to: Purchase products or services whenever and wherever you want, without ready cash and paying for them at a later date. Have the option of paying only a part of the total expenses. The balance amount can be carried forward, with an interest charged. Withdraw cash whenever, wherever you are, through ATMs and other withdrawal centers.48 | P a g e

Enjoy a revolving credit limit without any charges for a limited period (mostly 20 to 50 days) Transact money of more than one currency, from one country to another. Other facilities afforded on a credit card include reward points on card usage, insurance cover against air and road accidents, loss of baggage, and so on. All credit cards have built-in safety features like signatures and personal identification numbers.

Advantages of Credit Cards Credit cards offer enormous benefits to users and bankers alike. 1. Benefits to Cardholders Shopping convenience: Credit cards are convenient to use. They dispense with the need to carry large amount of cash or issue cheques. Shopping is made comfortable as purchasing poses no difficulty, since cards have wide acceptance. Credit facility: Credit cards offer a convenient mode of credit to customers. The customer need not go to the bank to apply for a loan that requires repayment in fixed installments. The credit card enables the cardholder to avail the credit facility sanctioned by the card issuing company. The customer can either repay the amount of49 | P a g e

credit in full, or can opt for repaying it in flexible monthly installments. Safety: Credit cards allow for a safe means of conducting transactions. Credit cardholders need not want to take a large amount of cash with them. Meticulous record: Credit cards facilitate meticulous and easy record keeping. The transactions are printed on a monthly statement that can be reconciled with the sales receipts issued by merchants. Thus, the accumulated interactions are easily accounted for every month. Acceptability: Merchant establishment widely accept VISA and MasterCard. This makes it very convenient for holding a credit card. 2. Benefits to Merchants: Enhanced Sales: The credit card mechanism makes the buying process convenient and easy. This in turn helps boost up the sales of business concerns as it increases purchasing power. Easy validation : The electronic system, which is the backbone of credit card operation, allows for easy verification of details about the customer. This greatly facilitates sale transactions by merchants. No risk: As there is no direct contact of the merchant establishment with collection of payments on credit cards, there is no risk to the merchant in accepting credit facility.50 | P a g e

3. Benefits to issuer Banks: Source of income : Credit cards provide an easy way to extend credit to customers. The credit, once granted, keeps revolving which results in the bank earning income through interest. Market expansion: Credit cards do not require the physical presence of a bank branch. Credit cards can be used by banks to increase their market presence. Cross - selling: Credit cards provide ample opportunity to banks for generation of additional revenue. This is possible by cross selling other banking products and services to its existing and potential cardholders. Disadvantages: You may become an impulsive buyer and tend to overspend because of the ease of using credit cards. Cards can encourage the purchasing of goods and services you cannot really afford.

Lost or stolen cards may result in some unwanted expense and inconvenience.

The use of a large number of credit cards can get you even further into debt.

Using a credit card, especially remotely, introduces an element of risk as the card details may fall into the wrong hands resulting in51 | P a g e

fraudulent purchases on the card. Fraudulent or unauthorized charges may take months to dispute, investigate, and resolve.

8. INTRODUCTION TO CREDIT CARD INDUSTRY 7.1 History Our society was once upon a time functioning without money; it is again likely to become moneyless. While ancient society was confronted with the problems of adjusting mutually satisfactory rates and basis of exchange, future society, with the help of computers, electronics and telecommunications, credit cards, telephone and other modern means of communications, would settle financial transactions instantly. Money as a medium of exchange will serve its function. The difference will be that in future coins, currency notes, cheques, etc., will be dispensed with in favour of records. India has entered the stage of credit card system and credit cards are gaining52 | P a g e

increasing relevance to facilitate industrial, commercial and agricultural transactions. Credit was first used in Assyria, Babylon and Egypt 3,000 years ago. The bill of exchange the forerunner of bank notes - was established in the 14th century. Debts settled by one-third cash and two-thirds bill of exchange paper money followed only in the 17th century. The first advertisement for credit was placed in 1730 by Christopher Thornton who offered furniture that could be paid off weekly. In the 1920s shoppers plate buy now, pay later system was introduced in USA. It could only be used in shops which issued it. The credit card was the successor of a variety of merchant credit schemes. It was first used in the 1920s, in the United States, specifically to sell fuel to a growing number of automobile owners. In 1938 several companies started to accept each other's cards. The concept of paying merchants using a card was invented in 1950 by Ralph Schneider and Frank X. McNamara in order to consolidate multiple cards. The Diners Club, which was created partially through a merger with Dine and Sign, produced the first "general purpose" charge card, which is similar but required the entire bill to be paid with each statement; Western Union had begun issuing charge cards to its frequent customers in 1914. MasterCard came to being in 1966 when a group of credit-issuing banks established Master Charge. The fractured nature of the US

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banking system meant that credit cards became an effective way for those who were travelling around the country to move their credit to places where they could not directly use their banking facilities. In 1966 Barclaycard in the UK launched the first credit card outside of the US. There are now countless variations on the basic concept of revolving credit for individuals including organization-branded credit cards, corporate-user credit cards, and store cards and so on. In contrast, because of the legislative framework surrounding banking system overdrafts, some countries, France in particular, were much faster to develop and adopt chip-based credit cards which are now seen as major anti-fraud credit devices. 8.2 Credit Cards Industry in India Credit card or the plastic money, as it is popularly referred to, was slow to enter the Indian market because of the high sentimental value that Indian consumers attach to hard cash. Prevalence of small value transaction, credit shy culture and inadequate banking habits of the population were other hindrances. Credit cards arrived in India about two decades ago. In the early stages its growth was very slow in terms of number and value. Even the number of players was limited and mainly foreign banks like HSBC, Citibank and Standard Chartered Bank dominated the

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market. Indian banks did not show much interest in the product in the initial stages. This is evident from the fact that it took State Bank of India (SBI), Indias largest bank, almost a decade to begin dealing in credit cards. SBI, despite its widespread reach, has aggressively started promoting credit cards only three years ago. However, in the recent past the scenario has changed dramatically. The number of nationalized and private banks issuing credit cards has increased significantly. Credit cards are now not only integral parts of the consumers life in metros, but even residents of smaller cities and towns have taken to them. This can be attributed to the aggressive strategy of nationalized and private banks to promote card products in smaller town and cities. These banks have far wider reach and depth in smaller cities and town as compared to foreign banks. They have capitalized on this advantage to play a major role in expanding the credit card base in terms of number and usage in smaller cities and town. Transactions using plastic money involve the payment of a small fee to the issuing bank in the form of an application/joining fee and an annual fee. Consumers collect a percentage-based commission in the form of reward points for card usage at shops/establishments. The usage of credit card is very simple and easy. The consumers do not have to carry cash and can use the card to pay their shopping/restaurant bills. All you are required to do is give your credit card at the payment counter, the person handling the counter swipes the card into the system to check the details of the card and you need to sign on the bill. The payment is done electronically.

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With only a signature your payment is taken care of. Isnt it very simple? Yes it is, but everyone isnt eligible for a credit card. There are certain requirements, varying across banks, to get a credit card. Typically credit card companies (or issuing banks, as they are known) require the applicant to have a minimum income level before he can apply for the card. Proof of income is given by way of documents. These documents could be a copy of tax return filed; salary slips if applicable, balance sheet and profit and loss account detail if you are self-employed. These serve as the starting point while applying for a card. The minimum income level varies from bank to bank and fluctuates between Rs 60,000 - 150,000 per annum depending upon your risk profile and the type of card. This requirement helps the issuing bank to assess whether or not you will be able to repay the expenses incurred through your credit card. In addition to income eligibility, you need to be at least 21 years of age (maximum 65 years). There is no doubt that credit cards are very convenient, especially in case of daily expenses. In addition you earn bonus points while you spend via the card. It is because of these reasons that in the recent past card usage has increased dramatically. In fact, plastic currency has almost wiped off hard currency from the US, resulting in far less expenditure associated with cash transactions. Currently, six major bishops are ruling the card empire HDFC, ICICI, Citibank, Standard Chartered Bank, HSBC and State Bank of India (SBI). The robust growth in the Indian economy is also witnessed in the

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credit card industry. Higher disposable income by relatively younger workforce in Mid 20s has made India a perfect market for credit card companies.

8.3 Statistics and Projections of the Indian credit card industry India is currently the fastest growing Mobile Market in the world and is also among the fastest growing credit card markets in the world . India has a total approx.75 million cards under circulation (25 million credit and 50 million debit) and a 30% year-on-year growth. With 87% of all transactions in plastic money happening through credit cards, debit cards in India continue to be used largely for cash withdrawals. Though Visa, which accounts for 70% of the total card industry is the market leader in India; MasterCard is fast catching up. Every transaction involves payment of an interchange charge to MasterCard or Visa for settlement, which amounted to about $50 million during the year. A domestic card payment settlement company57 | P a g e

would save the outgo on commission paid to Visa and MasterCard, a senior banker said. India is still under penetrated as far as cards are concerned . Today the country has less than 1 per cent of personal consumption expenditure (PCE) happening on cards. This compares very poorly with the global average of 5 per cent PCE on cards and is miniscule when compared to the 15 per cent PCE of developed nations. Senior bankers feel that very few Indians carry a credit card, with the penetration level being as low as over 2 per cent while that for comparable economies, it stands at 10-12 per cent. Though the penetration level is lower, the spend pattern of Indians is more or less in synch with the international spends, with travel, entertainment, retail shopping and jewellery being the top categories where credit cards are used. Bankers expect their credit card business to grow by over 30 per cent in 2007-08. Credit cards have seen a gradual growth from about 3.5million in 2000 to 25 million in 2007. Internal estimates of Barclaycard have pegged the Indian market with potential to grow to atleast 55million credit cards by 2010-11. Not just the number of users have increased, but also the average credit has gone up from $368(Rs16,560) in 2000 to approximately $450(Rs20,250) in 2007. Indians spend just 1% of their total purchases through credit cards while the Koreans make one-fifth of their total purchases through credit cards. The world average hovers around 9%.

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8.4 Credit Card Operations of banks- Guidelines 21 st July 2010 Pursuant to the announcement made in the Annual Policy Statement 2009-10, the Reserve Bank of India had constituted a Working Group on Regulatory Mechanism for Cards. The Group has suggested various regulatory measures aimed at encouraging growth of credit cards in a safe, secure and efficient manner as well as to ensure that the rules, regulations, standards and practices of the card issuing banks are in alignment with the best customer practices. The following guidelines on credit card operations of banks have been framed based on the recommendations of the Group was also the feedback received from the members of the59 | P a g e

public, card issuing banks and others. All the credit card issuing banks / NBFCs should implement these guidelines immediately. Guidelines for Implementation Fair Practices Code Each bank must have a well documented policy and a Fair Practices Code for credit card operations. The Banking Codes and Standards of India (BCSBI) has released a Code of Banks Commitment to Customers(Code) in July 2006 as also a Guidance Note in December 2006, which have been adopted by most of the banks with the approval of their Boards. Such of the banks which have subscribed to the BCSBI Code may incorporate the principles contained in BCSBI Code for evolving their Fair Practices Code for credit card operations, in lieu of IBA Fair Practices Code for credit card operations. The banks Fair Practices Code, should at a minimum, incorporate the relevant guidelines contained in this Master Circular. Banks/NBFCs should also widely disseminate the contents of this Master Circular, including through their websites. Issue of cards a. Banks/NBFCs should ensure prudence while issuing credit cards and independently assess the credit risk while issuing cards to persons, especially to students and others with no independent financial means. Add-on cards i.e. those that are subsidiary to the principal card, may be issued with the clear understanding that the liability will be that of the principal cardholder. b. Banks have been advised that in case of all categories of loans irrespective of any threshold limits, including credit card applications, banks should convey in writing the main reason/reasons which in the opinion of the bank have led to the rejection of the loan applications. It is reiterated that banks should convey in writing the main reason/reasons which have led to the60 | P a g e

rejection of the credit card applications. c. As holding several credit cards enhances the total credit available to any consumer, banks/NBFCs should assess the credit limit for a credit card customer having regard to the limits enjoyed by the cardholder from other banks on the basis of self declaration/ credit information. d. The card issuing banks/NBFCs would be solely responsible for fulfillment of all KYC requirements, even where DSAs / DMAs or other agents solicit business on their behalf. e. While issuing cards, the terms and conditions for issue and usage of a credit card should be mentioned in clear and simple language (preferably in English, Hindi and the local language) comprehensible to a card user. The Most Important Terms and Conditions (MITCs) termed as standard set of conditions, as given in the Annex, should be highlighted and advertised/ sent separately to the prospective customer/ customers at all the stages i.e. during marketing, at the time of application, at the acceptance stage (welcome kit) and in important subsequent communications.

Interest rates and other charges Credit card dues are in the nature of non-priority sector personal loans and as such, upto June 30, 2010, banks were free to determine the rate of interest on credit card dues without reference to their BPLR and regardless of the size in terms of the Master Circular on Interest rates on advances However, banks have been advised that Base Rate system will replace the BPLR system with effect from July 01, 2010. All categories of loans should henceforth be priced only with reference to the Base Rate except: a) DRI advances b) Loans to banks own employees c) Loans to bank's depositors against their own deposits.61 | P a g e

Banks are advised to be guided by the instructions contained in the circular dated April 09, 2010 while determining the interest rate on Credit Card dues. Banks have also been advised that they should prescribe a ceiling rate of interest, including processing and other charges, in respect of small value personal loans and loans similar in nature. The above instructions are applicable to credit card dues also. In case, banks/ NBFCs charge interest rates which vary based on the payment/ default history of the cardholder, there should be transparency in levying of such differential interest rates. In other words, the fact that higher interest rates are being charged to the cardholder on account of his payment / default history should be made known to the cardholder. For this purpose, the banks should publicize through their website and other means, the interest rates charged to various categories of customers. Banks/NBFCs should upfront indicate to the credit card holder, the methodology of calculation of finance charges with illustrative examples, particularly in situations where a part of the amount outstanding is only paid by the customer. Further, the banks/NBFCs have to adhere to the following guidelines relating to interest rates and other charges on credit cards: a. Card issuers should ensure that there is no delay in dispatching bills and the customer has sufficient number of days (at least one fortnight) for making payment before the interest starts getting62 | P a g e

charged. In order to obviate frequent complaints of delayed billing, the credit card issuing bank/NBFC may consider providing bills and statements of accounts online, with suitable security built therefore. Banks/ NBFCs could also consider putting in place a mechanism to ensure that the customers acknowledgement is obtained for receipt of the monthly statement. b. Card issuers should quote Annualized Percentage Rates (APR) on card products (separately for retail purchase and for cash advance, if different). The method of calculation of APR should be given with a couple of examples for better comprehension. The APR charged and the annual fee should be shown with equal prominence. The late payment charges, including the method of calculation of such charges and the number of days, should be prominently indicated. The manner in which the outstanding unpaid amount will be included for calculation of interest should also be specifically shown with prominence in all monthly statements. Even where the minimum amount indicated to keep the card valid has been paid, it should be indicated in bold letters that the interest will be charged on the amount due after the due date of payment. A legend/notice to the effect that " Making only the minimum payment every month would result in the repayment stretching over -------- years with consequent interest payment on your outstanding balance" should be prominently displayed in all the monthly statements so as to caution the customers about the pitfalls in paying only the minimum amount due. c. Banks/NBFCs should step up their efforts on educating the63 | P a g e

cardholders of the implications of paying only the minimum amount due. The Most Important Terms and Conditions should specifically explain that the free credit period is lost if any balance of the previous months bill is outstanding. For this purpose, banks/ NBFCs could work out illustrative examples and include the same in the Welcome Kit sent to the cardholders as also place it on their website. d. The banks /NBFCs should not levy any charge that was not explicitly indicated to the credit card holder at the time of issue of the card and without getting his / her consent. However, this would not be applicable to charges like service taxes, etc. which may subsequently be levied by the Government or any other statutory authority. e. The terms and conditions for payment of credit card dues, including the minimum payment due, should be stipulated so as to ensure that there is no negative amortization. f. Changes in charges (other than interest) may be made only with prospective effect giving notice of at least one month. If a credit card holder desires to surrender his credit card on account of any change in credit card charges to his disadvantage, he may be permitted to do so without the bank levying any extra charge for such closure. Any request for a closure of a credit card has to be honored immediately by the credit card issuer, subject to full settlement of dues by the cardholder. g. There should be transparency (without any hidden charges) in64 | P a g e

issuing credit cards free of charge during the first year. Wrongful billing The card issuing bank / NBFC should ensure that wrong bills are not raised and issued to customers. In case, a customer protests any bill, the bank / NBFC should provide explanation and, if necessary, documentary evidence to the customer within a maximum period of sixty days with a spirit to amicably redress the grievances.

Use of DSAs / DMAs and other agents

a. When banks / NBFCs outsource the various credit card operations, they have to be extremely careful that the appointments of such service providers do not compromise with the quality of the customer service and the bank / NBFCs ability to manage credit, liquidity and operational risks. In the choice of the service provider, the bank / NBFCs have to be guided by the need to ensure confidentiality of the customers records, respect customer privacy, and adhere to fair practices in debt collection. b. In terms of the BCSBIs Code of Banks Commitment to Customers, banks which have subscribed to the Code are required to prescribe a Code of Conduct for their Direct Sales Agents (DSAs) whose services are engaged by banks for marketing their products/services. Banks should ensure that the DSAs engaged by them for marketing their credit card products scrupulously adhere to the banks/NBFCs own Code of Conduct for Credit Card operations which should be displayed on the individual banks/NBFCs website65 | P a g e

and be available easily to any credit card holder. c. The bank / NBFC should have a system of random checks and mystery shopping to ensure that their agents have been properly briefed and trained in order to handle with care and caution their responsibilities, particularly in the aspects included in these guidelines like soliciting customers, hours for calling, privacy of customer information, conveying the correct terms and conditions of the product on offer, etc. Redressal of Grievances a. Generally, a time limit of sixty (60) days may be given to the customers for preferring their complaints grievances. b. The card issuing bank / NBFC should constitute Grievance Redressal machinery within the bank / NBFC and give wide publicity about it through electronic and print media. The name and contact number of designated grievance redressal officer of the bank / NBFC should be mentioned on the credit card bills. The designated officer should ensure that genuine grievances of credit card subscribers are redressed promptly without involving delay. c. Banks/NBFCs should ensure that their call centre staff are trained adequately to competently handle all customer complaints. d. Banks/NBFCs should also have a mechanism to escalate automatically unresolved complaints from a call center to higher authorities and the details of such mechanism should be put in public domain through their website.

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e. The grievance redressal procedure of the bank / NBFC and the time frame fixed for responding to the complaints should be placed on the bank / NBFC's website. The name, designation, address and contact number of important executives as well as the Grievance Redressal Officer of the bank / NBFC may be displayed on the website. There should be a system of acknowledging customers' complaints for follow up, such as complaint number / docket number, even if the complaints are received on phone. f. If a complainant does not get satisfactory response from the bank / NBFC within a maximum period of thirty (30) days from the date of his lodging the complaint, he will have the option to approach the Office of the concerned Banking Ombudsman for redressal of his grievance/s. The bank / NBFC shall be liable to compensate the complainant for the loss of his time, expenses, financial loss as well as for the harassment and mental anguish suffered by him for the fault of the bank and where the grievance has not been redressed in time. Internal control and monitoring systems With a view to ensuring that the quality of customer service is ensured on an on-going basis in banks / NBFCs, the Standing Committee on Customer Service in each bank / NBFC may review on a monthly basis the credit card operations including reports of defaulters to the CIBIL, credit card related complaints and take measures to improve the services and ensure the orderly growth in the credit card operations. Banks / NBFCs should put up detailed67 | P a g e

quarterly analysis of credit card related complaints to their Top Management. Card issuing banks should have in place a suitable monitoring mechanism to randomly check the genuineness of merchant transactions. Right to impose penalty The Reserve Bank of India reserves the right to impose any penalty on a bank / NBFC under the provisions of the Banking Regulation Act, 1949/the Reserve Bank of India Act, 1934, for violation of any of these guidelines.

8.5 Credit card market in India Market Share The Top 10 Credit Card Issuers in India are as follows, ICICI Bank - 5.07 Mn HDFC Bank - 4.42 Mn SBI Cards - 2.65 Mn Citibank - 2.54 Mn HSBC Cards - 1.3 Mn StanChart Credit Cards - 1.1 Mn ABN Amro - 0.78 Mn Axis Bank - 0.57 Mn Deutsche Bank - 0.495 Mn American Express - 0.45 Mn68 | P a g e

Industry Spend The total spends in the payment industry for the year 2009-10 crossed Rs. 51,000 crores at the POS. This reflects a growth of 53% over the previous year. ICICI Bank is the leader in capturing maximum spends with 32% market share, followed by Citibank at 20% market share. The combined share in terms of spends of the MNC Banks is about 43%. India currently has over 240 lakh credit cardholders, who make purchases totalling Rs. 33,000 crores per annum. Compared to the Asian market, the card market in India is at a nascent stage. Total card credit in India is only at around 1.22% of Asian credit. Market for credit cards in India is made up of 18 major banks and financial institutions providing credit card products and services. There are 11 major types of credit cards available in India. Major Credit Card Providers in India Following are major credit card providers in India: - ABN AMRO - American Express - AXIS BANK - Bank of Baroda - Bank of India - Bank of Maharashtra - Barclays

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- Canara Bank - Central Bank of India - Citi Bank - Corporation Bank - Deutsche Bank HDFC Bank - HSBC Bank - ICICI Bank - Indian Bank - Indian Overseas Bank - Jammu & Kashmir Bank - Kotak Mahindra Bank - Punjab National Bank - Reliance Capital Ltd. - Royal Bank of Scotland - Standard Chartered Bank - State Bank of India - Syndicate Bank - Union Bank of India - Vijaya Bank Major Indian Credit Card Types Following are various types of credit cards available in India:

Premium Credit Cards Cash Back Credit Cards Gold Credit Cards

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Airline Credit Cards Silver Credit Cards Business Credit Cards Balance Transfer Credit Cards Co-branded Credit Cards Low Interest Credit Cards Lifetime Free Credit Cards Rewards

There are some additional credit cards that are available in India as well. Rewards credit cards available in India can be subdivided into six categories Points, Hotels and Travels, Retail, Auto and Fuel. A number of banks are offering low interest credit cards in India in order to help the cardholders manage their finances in a better way. These cards are highly availed by Indian consumers on account of their low interest rates. Various types of credit card schemes offered by different banks:1. HDFC BANK HDFC Bank is bringing out eleven credit card products in India. These cards offer a wide range of benefits and rewards for cardholders. HDFC Bank Silver Credit Card Following are some features of HDFC Bank Silver Credit Card:

5% cash back on your Monthly household purchase. 5% cash back on mobile bill payments through smartpay

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Get 5 reward points for every Rs.100 spent above Rs.5,000 in a month. For spends up to Rs 5,000 in a month you get 2 reward points per Rs 100 spent. You can also redeem your accumulated reward points for air miles on leading airlines like Jet Airways, Air India, Kingfisher Airlines and Air Sahara.

HDFC Gold Business Credit Card Following are some facts about HDFC Bank Gold Credit Card:

Get up to Rs 10 lakh as credit limit on the card on the basis of the company/business financial. Withdraw cash up to 40% of your credit limit at a very nominal charge from any one of HDFC ATMs. Petrol Surcharge Waiver Business Insurance Cover Travel Insurance Cover You will earn 1 reward point for every Rs 200 spent on your card.

HDFC Bank Titanium Credit Card Following are salient features of HDFC Bank Titanium Credit Card:

Golf Course Referral and Reservation Flowers and Gift Delivery Service Dining Referral and Reservation Service Lost Card Liability Zero petrol surcharge If your billing for the month is greater than Rs 10,000, you earn 5

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points for every Rs 100 spent incrementally. HDFC Womans Gold Credit Card Following are some features of HDFC Womans Gold Credit Card:

5% cash back on your Monthly household purchase 5% cash back on mobile bill payments through smartpay Get 5 reward points for every Rs.100 spent above Rs.5,000 in a month. For spends up to Rs 5000 in a month you get 2 reward points per Rs 100 spent. You can also redeem your accumulated reward points for air miles on leading airlines like Jet Airways, Air India, Kingfisher Airlines etc.

Following are some other credit cards provided by HDFC Bank in India:

HDFC Bank Health Plus Credit Card HDFC Bank Platinum Plus Credit Card HDFC Bank Corporate Credit Card HDFC Bank Visa Signature Credit Card HDFC Bank Gold Business Credit Card HDFC Bank Value Plus Credit Card

2. ICICI BANK ICICI Bank is issuing 29 separate credit cards in India. These cards cater to a wide client base including sports lovers and businessmen for example. ICICI Signature Credit Card

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Following are some points on ICICI Signature Credit Card: Welcome aboard with the following 'Red Carpet' Privileges:o

30,000 Reward Points, which you can redeem for any reward from the ICICI Bank 'Hand-Picked Rewards Catalogue', an exclusive catalogue for premium cardholders. Exclusive options against 30,000 Hand-Picked Rewards for ICICI Bank Signature Credit cardholders - Tag Hueur or Raymond Weil watches, Mont Blanc accessories International Golf Fee card with two year membership that powers travel, golfing and leisure benefits Priority Pass that provides access to more than 600 of the world's exclusive airport lounges. Complete waiver of lounge access changes when you book your international air ticket on your Signature Card.

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Powerful rewards programme: Earn up to 10 Hand-Picked Rewards per Rs. 100 spent on your Signature Card. To know how. Redeem rewards against premium brands from the exclusive `Hand-Picked Rewards catalogue. Every 1100 Hand-Picked Rewards gives Rs 1000 worth of vouchers. Air-accident insurance of Rs. 3 crore. Complimentary companion ticket on booking at www.pvrcinemas.com* note: Till Sep 09. For detailed terms and conditions, please refer to www.pvrcinemas.com Save time with I-Assist: 24x7 personal concierge services, offering a host of benefits including international medical services,74 | P a g e

exclusively for ICICI Bank Signature Credit cardholders. ICICI Bank Platinum Credit Card Following are some features of ICICI Bank Platinum Credit Card:

High credit limit and cash limit 1 reward point for every Rs. 100 spent Air