Charging unlawful excess amount from credit card users
Monday, 9 January 2012
Badrudduza Choudhury
This is universally known that ultimate consumers, meaning individuals in a society, collectively keep the momentum alive of an economy. For this, the buying power of the consumers' has to be kept not only active but also increasing. As part of this requirement, one of the most popular and successful innovative concept is "to convert the individual's future buying power to present." In the relevant literature, it is widely known as conversion of future money into the present.
The credit card business has dramatically increased world-wide owing to the inherent qualities in accordance with the aforementioned concept, in meeting the various desires of the consumers. During the past few years, some banks in Bangladesh have been doing good business in consumer lending through plastic cards. But until now only two globally known credit card brands could enter Bangladesh market. They are Visa, Master and American Express. There are debit cards as well which basically are replacing the use of the cheques.
To be more precise, all the plastic cards, irrespective of their underlying debit or credit functionalities, are to be termed as digital cheques or digital money. It is predicted and assumed that after, let us say, 30 to 40 years down the line in future the wider use of plastic cards in the pan-global economy might make physical existence of paper money redundant and its use shall cease. Money will only have its accounting existence like a SDR (special drawing right). On reaching this elevated level that might be called a great global green banking for saving the trees and forests from human destruction that is currently needed for making pulp and paper money. This will also bring revolutions in many other areas of banking and financial world like the necessity of safe keeping of paper money in vaults shall evaporate and use of ATMs will die down.
Money laundering and economy under the ground shall face new challenges for their unlawful survivals. In the race m-banking might take the lead over the plastic card in removing the use of paper money for multifarious advantages that are available in a cell phone.
The Bangladesh Bank has permitted each bank to extend overdraft /funded loan maximum up to Bangladesh Tk 0.5 million (Tk 5.0 lakh) to an individual as directed through its prudential guidelines for consumer lending. On the other side, a Bangladeshi resident is eligible to spend foreign currency abroad to cover his/her travel and associated expenses outside up to a maximum of US$ 5,000 to $ 6,500 in a calendar year. This restriction applies when the resident is buying the said foreign currency from the dealer bank, out of cash local Taka source. This local money in turn may come from cash in hand and/or from deposit account or from a Taka loan account. The credit cards issuer banks are offering this loan to the users within the said regulatory ceiling of Tk 0.5 million (Tk 5.0 lakh).
The credit card-holder traveller is merrily spending money within the regulatory framework while staying abroad. Since this is an overdraft to a consumer without any security the rate of interest is as high as 30 to 32 per cent per year. The minimum monthly payment of the said borrowing can be as small as 2.5 per cent of the outstanding amount. This easy repayment programme is very suitable to the corresponding income-generating stream of a large section of user-travellers. As a result, full repayment of this credit may take as lengthy a time as 40 months or more.
Banks in the process have adopted a wrong method in violation of local exchange regulations for the recovery of the said Taka loan given to the credit card users to buy foreign currency from them while paying the expenses of their stay abroad. The general public as such is not fully exposed to this complex process of banking and remains largely unaware of the hidden fact that excess money is being taken from them while making monthly payment to bank.
The statement of a credit card account that a bank is generating and handing over to its holder shows the accounts of loan in foreign currency despite a prohibition to lend such money to a resident by a bank unless there is a dedicated foreign currency fund and the source of repayment is arranged accordingly as well out of sale of goods or services. Since the statement is always showing the amount in foreign currency (usually it is always US dollar) on each monthly maturity the card holder on being advised by the bank is paying the minimum amount in equivalent Taka, using the conversion rate prevalent on that day.
The problem originates from here. The bank is fully obliged to instantly convert the amount of foreign currency spent by a card-holder abroad into the equivalent local currency and show it in the statement as Taka loan. For clarity of understanding, the writer is assuming that a card user may have swiped or used the card 10 times during the stay of let us say seven days. The value of each transaction was US$ 100. But during this seven-day period the Taka-dollar exchange rate, let us say, fluctuated once and assume that Taka depreciated from 76 to 80 per dollar. Assume five transactions worth a total of US$ 500 took place when exchange rate was Tk 76 per dollar and the remaining when it went down to Tk 80. A regulatory compliant bank would generate the card statement, showing total loan of Tk 78,000 for instantly converting the dollars spent into local currency (500x76+500x80), applying exchange rate prevailing at the time of making payment to the vendors-bank abroad. The card holder will go on repaying this amount of Tk 78,000 at 30 or 32 per cent rate of interest.
But a non-compliant bank (that is mostly and currently occurring in the market) for the above-described same scenario, is generating a statement showing a total loan outstanding of US$ 10,000 and recovering 2.5 per cent at the minimum in an equivalent amount of Taka applying exchange rate of Tk 80 per dollar (to begin with) prevalent at the time of making the first installment with option to pay Tk 80,000 for full adjustment. And if before the maturity of paying the second monthly installment Taka may depreciate further let us say to Tk 84/dollar, than this non-compliant bank shall recover an equivalent amount of Taka at 2.5 per cent of statement shown a dollar outstanding applying Tk 84 per dollar. This process of recovering excess money will continue with the pace of Taka depreciation before each future maturity. Local currency historically is always depreciating in value compared to US dollar.
The card user in the process of monthly payment is also paying this non visible excess amount due to depreciation of Taka. Although the bank here has paid the same amount of foreign currency to the vendors' bank abroad at the time while the actual transactions took place using non-depreciated dollar-taka exchange rate at that time. For no reason the card holders are being penalised and the banks are making extra money that is going unnoticed even to the central bank. This is purely an exploitation of the user public for their lesser degree of awareness and even to those who know about; they are helplessly paying for a complex bureaucracy in existence that does not pay heed to any logical argument.
The central bank should immediately intervene in this process to review and give instructions to the banks about taking measures to refund the excess amount unjustifiably recovered from the helpless general public credit-card users. The image of the regulator will also go up further as the guardian of the banking system, by letting the purpose of this instruction known to the public through the media as they have recently released a similar message to the public for increasing awareness about opening foreign currency accounts by the residents and non residents as well.
The writer is banker and views expressed here are his own. He may be reached at e-mail: b_choudhuri@yahoo.com
This is universally known that ultimate consumers, meaning individuals in a society, collectively keep the momentum alive of an economy. For this, the buying power of the consumers' has to be kept not only active but also increasing. As part of this requirement, one of the most popular and successful innovative concept is "to convert the individual's future buying power to present." In the relevant literature, it is widely known as conversion of future money into the present.
The credit card business has dramatically increased world-wide owing to the inherent qualities in accordance with the aforementioned concept, in meeting the various desires of the consumers. During the past few years, some banks in Bangladesh have been doing good business in consumer lending through plastic cards. But until now only two globally known credit card brands could enter Bangladesh market. They are Visa, Master and American Express. There are debit cards as well which basically are replacing the use of the cheques.
To be more precise, all the plastic cards, irrespective of their underlying debit or credit functionalities, are to be termed as digital cheques or digital money. It is predicted and assumed that after, let us say, 30 to 40 years down the line in future the wider use of plastic cards in the pan-global economy might make physical existence of paper money redundant and its use shall cease. Money will only have its accounting existence like a SDR (special drawing right). On reaching this elevated level that might be called a great global green banking for saving the trees and forests from human destruction that is currently needed for making pulp and paper money. This will also bring revolutions in many other areas of banking and financial world like the necessity of safe keeping of paper money in vaults shall evaporate and use of ATMs will die down.
Money laundering and economy under the ground shall face new challenges for their unlawful survivals. In the race m-banking might take the lead over the plastic card in removing the use of paper money for multifarious advantages that are available in a cell phone.
The Bangladesh Bank has permitted each bank to extend overdraft /funded loan maximum up to Bangladesh Tk 0.5 million (Tk 5.0 lakh) to an individual as directed through its prudential guidelines for consumer lending. On the other side, a Bangladeshi resident is eligible to spend foreign currency abroad to cover his/her travel and associated expenses outside up to a maximum of US$ 5,000 to $ 6,500 in a calendar year. This restriction applies when the resident is buying the said foreign currency from the dealer bank, out of cash local Taka source. This local money in turn may come from cash in hand and/or from deposit account or from a Taka loan account. The credit cards issuer banks are offering this loan to the users within the said regulatory ceiling of Tk 0.5 million (Tk 5.0 lakh).
The credit card-holder traveller is merrily spending money within the regulatory framework while staying abroad. Since this is an overdraft to a consumer without any security the rate of interest is as high as 30 to 32 per cent per year. The minimum monthly payment of the said borrowing can be as small as 2.5 per cent of the outstanding amount. This easy repayment programme is very suitable to the corresponding income-generating stream of a large section of user-travellers. As a result, full repayment of this credit may take as lengthy a time as 40 months or more.
Banks in the process have adopted a wrong method in violation of local exchange regulations for the recovery of the said Taka loan given to the credit card users to buy foreign currency from them while paying the expenses of their stay abroad. The general public as such is not fully exposed to this complex process of banking and remains largely unaware of the hidden fact that excess money is being taken from them while making monthly payment to bank.
The statement of a credit card account that a bank is generating and handing over to its holder shows the accounts of loan in foreign currency despite a prohibition to lend such money to a resident by a bank unless there is a dedicated foreign currency fund and the source of repayment is arranged accordingly as well out of sale of goods or services. Since the statement is always showing the amount in foreign currency (usually it is always US dollar) on each monthly maturity the card holder on being advised by the bank is paying the minimum amount in equivalent Taka, using the conversion rate prevalent on that day.
The problem originates from here. The bank is fully obliged to instantly convert the amount of foreign currency spent by a card-holder abroad into the equivalent local currency and show it in the statement as Taka loan. For clarity of understanding, the writer is assuming that a card user may have swiped or used the card 10 times during the stay of let us say seven days. The value of each transaction was US$ 100. But during this seven-day period the Taka-dollar exchange rate, let us say, fluctuated once and assume that Taka depreciated from 76 to 80 per dollar. Assume five transactions worth a total of US$ 500 took place when exchange rate was Tk 76 per dollar and the remaining when it went down to Tk 80. A regulatory compliant bank would generate the card statement, showing total loan of Tk 78,000 for instantly converting the dollars spent into local currency (500x76+500x80), applying exchange rate prevailing at the time of making payment to the vendors-bank abroad. The card holder will go on repaying this amount of Tk 78,000 at 30 or 32 per cent rate of interest.
But a non-compliant bank (that is mostly and currently occurring in the market) for the above-described same scenario, is generating a statement showing a total loan outstanding of US$ 10,000 and recovering 2.5 per cent at the minimum in an equivalent amount of Taka applying exchange rate of Tk 80 per dollar (to begin with) prevalent at the time of making the first installment with option to pay Tk 80,000 for full adjustment. And if before the maturity of paying the second monthly installment Taka may depreciate further let us say to Tk 84/dollar, than this non-compliant bank shall recover an equivalent amount of Taka at 2.5 per cent of statement shown a dollar outstanding applying Tk 84 per dollar. This process of recovering excess money will continue with the pace of Taka depreciation before each future maturity. Local currency historically is always depreciating in value compared to US dollar.
The card user in the process of monthly payment is also paying this non visible excess amount due to depreciation of Taka. Although the bank here has paid the same amount of foreign currency to the vendors' bank abroad at the time while the actual transactions took place using non-depreciated dollar-taka exchange rate at that time. For no reason the card holders are being penalised and the banks are making extra money that is going unnoticed even to the central bank. This is purely an exploitation of the user public for their lesser degree of awareness and even to those who know about; they are helplessly paying for a complex bureaucracy in existence that does not pay heed to any logical argument.
The central bank should immediately intervene in this process to review and give instructions to the banks about taking measures to refund the excess amount unjustifiably recovered from the helpless general public credit-card users. The image of the regulator will also go up further as the guardian of the banking system, by letting the purpose of this instruction known to the public through the media as they have recently released a similar message to the public for increasing awareness about opening foreign currency accounts by the residents and non residents as well.
The writer is banker and views expressed here are his own. He may be reached at e-mail: b_choudhuri@yahoo.com