Debit Card, Credit Card and Micro-Credit Basics

Debit Cards / Credit Cards

Debit Card

A debit card is a plastic card that provides a cardholder electronic access to his / her bank account. It can be used to withdraw funds or to make purchases using money in the bank account. Since a debit card is essentially linked to a checking account (saving / current), it is also known as a Checking Card. A balance in the checking account is must for the use of debit card.

Credit card allows its holder to buy goods and services based on the holder’s promise to pay for these goods and services.

Credit Card

A credit card is a payment card which allows the cardholder to pay for goods and services on the basis of line of credit granted to him / her by the issuing bank.  A credit card essentially creates a revolving account from which cardholder can borrow money for payment to merchant (and also withdraw cash). A credit card is not linked to a bank account but is linked to the bank / financial institution which has issued it.

First Credit Card of the world

The use of Credit Card first started in 1920s in United States of America for selling the fuel to the automobile owners. Later, it reached the customers when when Diners Club was launched in early 1950s. In 1958, the Bank of America issued the BankAmericard in the California state and this is known to be the first successful modern credit card.

Differences between Debit Card and Credit Card

• A debit card is like an electronic cheque book, which is linked to the account of cardholder. Balance in the account is essential to use debit card. Credit cards give a line of credit to the cardholders and they don’t need a linked bank account. Credit Card payment is like a loan which needs to be paid back within a fixed period (such as 30 days).
• There is no monthly bills to be paid on debit cards. In case of Credit cards, monthly bills need to be paid by the customer. Late payments are charged a high interest.
• Obtaining the debit card is quite easy. Now a days, most banks provide Debit cards to checking account holders. After the RBI guidelines in 2005; obtaining a Credit Card has become difficult and it depends on many factors including credit score of the applicant.
• The Credit worthiness of the account holder plays no role in case of Debit Cards. The limit of usage is dependent on the balance in linked account. However, in case of credit cards, the limit of usage or credit line may increase or decrease depending on cardholder’s creditworthiness. This limit is set by the card issuer.
• Debit Card payments invite no interest charges; Credit card loans have one of the highest interest rates.

Major players in the Credit Card transactions

There are several players in the working of credit card / debit cards.

• The cardholderis the authorized user of a credit or debit card.
• Merchantor Point of sale is any business entity that is authorized to accept cards for the payment of goods and services; it can be a brick and mortar shop or a website.
• Merchant Bank or Acquirer is a financial institution that provides card processing services to the merchant.
• Card Issuer is a financial institution that issues payment cards and contracts with its cardholders for billing and payment of transactions.
• Further, there is a Credit Card Network orAssociation, which is a membership organization of financial institutions that issue payment cards and/or sign merchants to accept such cards for payment of goods and services. There are two Credit Card Associations – Visa’s and MasterCard.

How Credit Card transaction works?

The process can be divided into two parts viz. authorization and Clearing & Settlement.

Authorization

A credit card holder finalizes the goods to be bought and presents his card to the merchant. Merchant processes the card and while processing it seeks authorization from the Merchant Bank giving it information on transaction information. Merchant Bank submits the authorization request to Credit Card Network  (MasterCard or VISA). Credit Card Network sends the request to the Card Issuer which is ICICI bank. Card Issuer either approves or declines the transaction. If it authorizes, the Credit Card Network forwards this authorization to merchant bank. Merchant bank forwards this response to the Merchant and Merchant once receiving this authorization completes the transaction.

Clearing and Settlement

The merchant deposits the transaction receipt with the merchant bank, which credits the Merchant’s account and submits this transaction to Credit Card Network for settlement. Credit card Network pays the Merchant Bank and debits the account of Card Issuer. The Card Issuer posts the transaction to the account of Card holder. The cardholder received monthly statement from the Issuer. The Cardholder pays as per the conditions.

Size of the Credit Card

ISO/IEC 7810 is the international standard which defines the shape and size of the I-Cards. In most countries, it defines ATM cards, credit cards, debit cards etc. as ID-1 which corresponds to 85.60×53.98 mm.

Swipe Card

Swipe card or magstripe or Magnetic stripe card has a band of magnetic material on the card and is capable of storing data. It was first developed by IBM for a US Government security system. IBM engineer Forrest Parry is known to have discovered Swipe Card, thanks to his wife (search Google). The data on the strips can be read by the most point-of-sale hardware.

Credit Card Number

The Credit Card numbers are governed by the ISO/IEC 7812 which is a numbering system for the identification of issuers of cards that require an issuer identification number (IIN) to operate in international, inter-industry and/or intra-industry interchange. The Length of the number is from 14 to 19. The first 6 digits are known as the Issuer Identification Number (IIN). Out of them, the first 2 or more digits identify the Card network. For example- The card number that begins with 34, 35, 36 or 37 is an American Express Card; another which begins with 51,52,53,54 or 55 is a MasterCard and the number which becomes with 4 is a Visa card.

National Payments Corporation of India’s (NPCI)

National Payments Corporation of India’s (NPCI) was established in 2008 and is being promoted by State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC. NPCI is an umbrella organization for all retail payment systems in the country owned and operated by banks. Its National Financial Switch (NFS) is linked to 61702 ATMs (September 2010). The relevant data is released by NPCI.

Cumulative monthly transaction volumes recorded by the National Payments Corporation of India’s (NPCI) crossed the 10-crore mark for the first time in August 2010. The Switch recorded 7.32 crore ATM transactions in July 2010.

Floor Limit and Card Limit

Floor limit is the discretion to the merchant establishment up to which it can accept the card for payment. The Card limit is the limit up to which a holder can use the card. This is restored on making the previous payments.

Hot Card v/s Hot List

A hot card is a lost or stolen card. A hot list is the list of caution against the use of a credit card by a defaulter holder.

Common Credit Card Grievances

Some of the most common issues with the Credit Cards pertain to the late statements, harassment by the issuer, incorrect bills and cards issued without intimating the customer. The delayed payments attract an interest penalty of 2.95% of the billed amount but if the customer received the bill late, he/ she is not able to make a timely payment. In many cases, the banks executives call the customer on the pretext of increased the credit limit and try to sell other products. Sometimes, the time made payment also is charged a penalty, due to errors and omissions causing the complaints of the incorrect billing. Further, prior to the stringent action of RBI, the customers were issued credit cards without even asking for it.

RBI guidelines on Credit Card Business

To regulate credit/ATM/debit card businesses RBI constituted a ‘Working Group on Regulatory Mechanism for Cards’ and on the recommendation of this group, notified guidelines for card issuers laying down their duties and obligations. The salient features of the RBI guidelines, which came into effect on November 30, 2005, are as follows:

• All credit card issuers should provide Most Important Terms and Conditions (MITCs) to customers/prospective customers. MITCs should include information like joining fee, annual membership fee, cash advance fee, service charges for certain transactions, interest free grace period (illustrated with examples), finance charges for revolving credit and cash advances, overdue interest charges and charges in case of default.
• MITCs should be in Arial-12 points and not in fonts that are difficult to read with the naked eye.
• Card issuers should quote annualised percentage rate on card products (separately for retail purchase and cash advance).
• Card issuers should not provide unsolicited cards, loans and any other credit facilities or unilaterally increase credit limits. Card issuing banks/non-banking financial companies (NBFCs) should maintain Do Not Call Registries containing phone numbers of customers and non-customers who have informed them that they do not wish to receive unsolicited calls/SMSes for marketing of credit card products.
• Card issuing banks/NBFCs would be responsible as the principal for all acts of omission or commission of their agents (direct sales agents/direct marketing agents and recovery agents).
• Card issuers should follow RBI’s Fair Practice Code for Lenders and Indian Banks Association’s Code for Collection of Dues and Repossession of Security.

Further, the RBI guidelines provide that a customer, who fails to get a satisfactory response from a card issuer within 30 days of lodging of complaint may approach the concerned Banking Ombudsman for redressal of grievances before the expiry of one-year period from the date of receipt of reply from the bank or 13 months from the date of representation to the bank. Currently, there are 15 Banking Ombudsmen located in different state capitals who try to resolve complaints of customers through a process of conciliation or mediation.

Kisan Credit Card

Kisan Credit Card scheme was introduced by NDA Government in August 1998 with the aim to provide adequate and timely short-term credit needs of farmers during the cropping season. It was first proposed in the Budget 1998-99 by then Finance Minister Yashwant Sinha.

NABARD had prepared a Model Kisan Credit Card Scheme in consultation with the Major Banks on the basis of R V Gupta Committee.

Objective & Rationale Behind Kisan Credit Card Scheme

Due to lack of awareness among farmers and unnecessary delays, cumbersome procedure and improper practices adopted by institutional lending agencies; a large number of Farmers heavily depend on non-institutional sources of credit for their frequent needs to purchase farm inputs such as seeds, fertilizers, pesticides etc. The non-institutional credit is not only expensive but also counter-productive. The Kisan Credit Card scheme was launched to provide adequate, timely and cost effective institutional credit from the banking system to the farmers for their cultivation needs. Farmers can not only purchase inputs but also can withdraw cash from this credit card for their input needs.

How Kisan Credit Card Scheme works?

Kisan Credit Cards are issued to the farmers on the basis of their land holdings and other criteria such as timely payment of past credits etc. Farmers covered under the Kisan Credit Card scheme are issued with a credit card and a pass book or a credit card cum pass book incorporating the name, address, particulars of land holding, borrowing limit, validity period, a passport size photograph of holder etc., which may serve both as an identity card and facilitate recording of transactions on an ongoing basis.

Loans  provided under Kisan Credit Card Scheme

The Kisan Credit Card  scheme is implemented by public sector commercial banks, RRBs and cooperative banks. It was launched to provides short term loans in the form of production credit. However, later its scope was extended to term loans for agriculture and allied activities and reasonable component for consumption loan. Thus, currently this scheme provides:

• Production credit
• Working capital requirements for allied activities
• Ancillary credit requirements related to crop production
• Contingent needs and
• Accidental insurance of KCC borrowers.

Crop loans disbursed under KCC scheme for notified crops are covered under National Crop Insurance scheme. The purpose of the scheme is to protect the interest of farmers against crop loss caused by natural calamities, pest attacks etc.

Benefits of Kisan Credit Card Scheme?

• Simplifies disbursement procedures
• Removes rigidity regarding cash and kind
• No need to apply for a loan for every crop
• Assured availability of credit at any time enabling reduced interest burden for the farmer.
• Helps buy seeds, fertilizers at farmer’s convenience and choice
• Helps buy on cash-avail discount from dealers
• Credit facility for 3 years – no need for seasonal appraisal
• Maximum credit limit based on agriculture income
• Any number of withdrawals subject to credit limit
• Repayment only after harvest
• Rate of interest as applicable to agriculture advance
• Security, margin and documentation norms as applicable to agricultural advance
• Access to adequate and timely credit to farmers
• Full year’s credit requirement of the borrower taken care of.
• Minimum paper work and simplification of documentation for drawal of funds from the bank.
• Flexibility to draw cash and buy inputs.
• Assured availability of credit at any time enabling reduced interest burden for the farmer.
• Flexibility of drawals from a branch other than the issuing branch at the discretion of the bank.

Key Features of Kisan Credit Card Scheme?

• Farmers eligible for production credit of Rs. 5000 or more are eligible for issue of Kisan Credit Card.
• Eligible farmers to be provided with a Kisan Credit Card and a pass book or card-cum-pass book.
• Revolving cash credit facility involving any number of drawls and repayments within the limit.
• Limit to be fixed on the basis of operational land holding, cropping pattern and scale of finance.
• Entire production credit needs for full year plus ancillary activities related to crop production to be considered while fixing limit.
• Sub-limits may be fixed at the discretion of banks.
• Card valid for 3 years subject to annual review. As incentive for good performance, credit limits could be enhanced to take care of increase in costs, change in cropping pattern, etc.
• Each drawals to be repaid within a maximum period of 12 months.
• Conversion/re-scheduling of loans also permissible in case of damage to crops due to natural calamities.
• Security, margin, rate of interest, etc. as per RBI norms.
• Operations may be through issuing branch (and also PACS in the case of Cooperative Banks) through other designated branches at the discretion of bank.
• Withdrawals through slips/cheques accompanied by card and passbook.

Benefits to Banks under KCC scheme

• Reduction in work load for branch staff by avoidance of repeat appraisal and processing of loan papers under Kisan Credit Card Scheme.
• Minimum paper work and simplification of documentation for drawal of funds from the bank.
• Improvement in recycling of funds and better recovery of loans.
• Reduction in transaction cost to the banks.
• Better Banker – Client relationships.

Insurance facility under KCC scheme

Kisan Credit Card holders are covered by a personal accident insurance. This cover is available when the person enters the scheme. The cover is as follows:

• Death : Rs. 50,000
• Disability: Rs. 25000
• Maximum Age to enter : 70 years

Loan disbursement

Under KCC scheme, the loan amount is disbursed in cash through drawings made via withdrawal slips accompanied by KCC-cum-passbook. Cheque books are also issued to literate KCC holders enjoying KCC limit of Rs. 25000 and above.

Interest and other charges on Kisan Credit Cards

The interest rates on Kisan Credit Cards varies from bank to bank and also on borrowing limits. Generally, 9% per annum interest rate is charged for KCC borrowing limit up to Rs. 3 Lakh. However, central government provides interest subvention to the financing institutions. If the track record of the card holder is good; a further 2% interest subsidy is provided. After three years sound track record, a card holder can also get the credit limit enhanced.

Apart from that there are some overhead costs for borrowing under KCC. These include processing fee, charges on land mortgage deed, passport photo charges, insurance premium etc.

Micro Credit

Microcredit refers to the small credit (Below Rs. 50,000) given to poor by banks via SHGs (Self Help Groups) or JLGs (Joint Liability Groups) mechanism or by a NBFC (Non Banking Financial Company) or MFI Microfinance Institution. Reserve bank of India encourages the commercial banks to expand the coverage of micro finance in India.

The target market of the Micro Credit Institutions includes those individuals who lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to institutional credit. These include artisans, tiny and small industries, grocers, vegetable vendors, rickshaw pullers, roadside retailers and persons engaged in activities such as small farming, poultry, cattle rearing, piggery, fishery etc.

Microcredit is a part of microfinance. The term Microfinance is used for the provision of a wider range of financial services to the very poor. The United Nations declared 2005 the International Year of Microcredit.

Origin of the concept

The innovative idea of Microcredit originated in 1970s with the Grameen Bank in Bangladesh. The Grameen Bank is a microfinance organization of Bangladesh. Its founder Professor Muhammad Yunus launched a research project in 1976  to examine the possibility of designing a credit delivery system to provide banking services targeted to the rural poor. This bank successfully enabled extremely impoverished people to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty. Due to its achievements, the bank and its founder were jointly awarded Novel Prize in 2006.

Self Help Group

A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs belonging to homogenous social and economic background. They come together voluntarily to save small amounts regularly and contribute to a common fund to meet their emergency needs on mutual help basis. They are able to ensure proper end use of the credit and timely repayment on the basis of collective wisdom and peer pressure.

SHG provides strength to an economically poor individual as part of a group. Financing through SHGs reduces transaction costs for both lenders and borrowers.

Lenders have to handle only a single SHG account instead of a large number of small-sized individual accounts, borrowers as part of a SHG cut down expenses on travel (to & from the branch and other places) for completing paper work and on the loss of workdays in canvassing for loans.

History of micro credit in India

Prior to the nationalization of banks in 1969, most of the small loan was given out by cooperative banks only.  Commercial banks were not easily accessible to small borrowers. Those were the days of security-oriented approach and nobody could think of a loan, big or small, without a guarantor or mortgage of immovable property.

Nationalization changed the picture and the nationalized banks opened branches in the remotest corners of the country. They were to implement various government schemes such as Twenty Point Program, Antodaya, subsidized differentiated rate of interest loan etc.

SHG-Bank Linkage Programme

In 1991-92, NABARD had launched a pilot project to provide micro-credit. In this project, it was envisaged to provide micro-credit by linking SHGs with banks. This is called SHG-Bank linkage Programme. RBI had then advised commercial banks to actively participate in this linkage programme. The scheme was later extended to RRBs and co-operative banks.

Objective of this programme was to make it possible facilitating smoother and more meaningful banking for poor. This programme envisaged several models of linkages. For example:

• SHGs were directly linked to Banks without any NGO facilitation.
• SHGs were linked to banks with facilitation by NGOs and other formal agencies.
• NGO working as a facilitator and financing agency for the SHGs.

NGO’s undertake social intermediation like organizing SHGs of micro entrepreneurs. They entrust them to banks for credit linkage or financial intermediation like borrowing bulk funds from banks for on-lending to SHGs.

Who provides Microcredit?

• Domestic Commercial Banks: Public Sector Banks; Private Sector Banks & Local Area Banks
• Regional Rural Banks
• Co-operative Banks
• Co-operative Societies
• Registered NBFCs
• Unregistered NBFCs
• Other providers like Societies, Trusts, etc.

Are there any targets fixed by RBI?

No. For microcredit, there are no fixed targets and banks are free to formulate their own models. Banks are also free to design their products for promotion of microfinance. However, banks have been asked by the RBI to devise and integrate the microcredit plans in their block level, district level and state level credit plans

Banks are free to choose intermediaries, suitable branches, pockets, areas for implementation of microcredit programme. They are also free to devise appropriate lending and saving products. However banks have been instructed to include micro credit, in their branch, block and district & state credit plans. This has to be reviewed on quarterly basis.

Major problems with Micro-Credit

Despite of all these measures the performance of micro finance in India has neither been quite satisfactory quantitatively nor qualitatively. The money disbursed has not been adequate, nor has it yielded the desired results. Instead of being recycled, the major portions of loans have been lost as bad debt.

Micro Finance Development Fund

A Rs. 100 Crore Micro Finance Development Fund was created within NABARD in 2001 to impart training and exposure to SHGs, NGOs, Banks etc. for micro-finance.