Behind the scene of credit card limit and fund

[thecard]

Consider the scenario where my credit card limit is 5 Lakh, issued in January, and I make purchases totaling 5 Lakh in August.

Is the entire limit of 5 lakh consistently set aside in a dedicated account, or is it managed through a temporary swap from the bank's existing balance?

Are there specific RBI regulations governing how banks allocate funds for issuing credit limits? Given that banks have numerous customers with substantial limits, how is the allocation and management of funds handled?

I am curious about the operational aspects that underlie the credit card limit process and would appreciate insights into the financial mechanisms involved.

 

[Tejo]

Consider the scenario where my credit card limit is 5 Lakh, issued in January, and I make purchases totaling 5 Lakh in August.

Is the entire limit of 5 lakh consistently set aside in a dedicated account, or is it managed through a temporary swap from the bank's existing balance?

Are there specific RBI regulations governing how banks allocate funds for issuing credit limits? Given that banks have numerous customers with substantial limits, how is the allocation and management of funds handled?

I am curious about the operational aspects that underlie the credit card limit process and would appreciate insights into the financial mechanisms involved.

Mostly banks don't give .. more limit depends on your are salary or itr

One more trick .....3
People have managed to take their card to high limit on a x card and by that on c2c got huge amounts of cards in their wallet.

 

[NOOBY]

Mostly banks don't give .. more limit if your are salary or itr less.

One more trick .....3
People have managed to take their card to high limit on a x card and by that on c2c got huge amounts of cards in their wallet.

I think you replied without even understanding what he meant to ask

Vo puuch raha hai ki Bank kaise hamari jagah khud paise dene mai saksham hai...

Consider the scenario where my credit card limit is 5 Lakh, issued in January, and I make purchases totaling 5 Lakh in August.

First thing first, the limit is set per month. If you have 5L limit, you can spend 5L in each month as well

Given that banks have numerous customers with substantial limits, how is the allocation and management of funds handled?

Risks are involved. They know that not every person would spend 100% on their card in a given month, so it's based on average usage (supposedly) with some additional buffer to compensate ramdom surges.

I think sir @RAMESH BABU N would be the best person to help us with this info.

 

[Bharat]

I think its max credit Limit at any point in time for most/all of the CCs .... if you have CL=2L and use 2L you can only use 3L regardless of the month until you clear out your balances.
From my understanding, It's the same as any loan where the bank utilizes a percentage of their assets to give as a loan and gain interest, and in terms of CC it would be MDR (+interest+fees+penelty etc).

 

[Kvv2311]

Consider the scenario where my credit card limit is 5 Lakh, issued in January, and I make purchases totaling 5 Lakh in August.

Is the entire limit of 5 lakh consistently set aside in a dedicated account, or is it managed through a temporary swap from the bank's existing balance?

Are there specific RBI regulations governing how banks allocate funds for issuing credit limits? Given that banks have numerous customers with substantial limits, how is the allocation and management of funds handled?

I am curious about the operational aspects that underlie the credit card limit process and would appreciate insights into the financial mechanisms involved.

Credit card is nothing but an unsecured loan. Basically bank has to allocate capital for entire limit with 150% risk weight currently for credit card. However banks will insert a clause for unconditional cancellability of limit in the T&C which allows Bank to allocate capital for only 150% of outstanding limits of credit card. The capital to be allocated varies depending on whether the credit card account is standard or stressed.

If you are asking about asset liability mismatch credit card outstanding is a very small pie and it is also managed along with the overall treasury management

 

[thecard]

Mostly banks don't give .. more limit depends on your are salary or itr

One more trick .....3
People have managed to take their card to high limit on a x card and by that on c2c got huge amounts of cards in their wallet.

Thank you but your response is not related to my query ,

 

[thecard]

@RAMESH BABU N , Sir can you please share your thoughts

 

[RAMESH BABU N]

There are restrictions n compliances to be followed for doing CC business in our market. In the initial stages, it would be easy - but as the volume n complexity n reach grows exponentially, it is difficult to put it (the CC business) within the framework of banking - to comply with the guidelines. Hence, we see separate companies/firms being floated exclusively for CC business. For ex - SBI Cards, BOB Fin.... In such cases, these WOSC - wholly owned subsidiary companies - does not come under the BRA, IBA.... as they are not strictly Banks - legally speaking. Owned by Banks but functionally not banks. Like any other business, they get a loan-capital-working capital and have to pay a dividend to the owner banks.

How they operate is akin to our own individual overdraft current accounts - limit is notional n for operational control. Purely based on the total transactions value - which is treated as clean overdraft. The credits are the MDR commissions, POS Rents they get, and the monthly interests they charge on part-payments n EMIs, besides the promotional charges refunded by corporate tie ups. Like in any lending, sufficient provisions are made for bad n doubtful CC accounts. And, the charges incurred for all types of followup, recovery infra, n the operating costs like communications....

As the business cycles are monthly, there are quick monitoring tools to see, control n report the mismatch between the debits n credits - like in any other business cash-book style.

At the end of each month, depending upon the net, profit or loss, suitable managerial inputs are given to the operating teams to monitor n control.

Unlike housing loans or business loans (C&I, SIB, SME or agri) or vehicle loans - where assets are created n the repayment is relatively stable on expected lines, CC business is more riskier n therefore based on more discretion powers - at times looking very illogical or strange. Unlike the EduLoans - where refinance n subsidy benefits are given, CC business is not having that sort of luxury.

The total approvals - on a daily basis - are monitored closely. Daily/weekly/monthly inflows n outflows are strictly monitored. Seasonal changes - like Great Indian Shopping Festivals by Amazon, FK.... - are also factored in such monitoring.

This is like any other commodity businesses during the festive seasons or during calamities or down turn in business due to cycles or external factors.

The Funds Management Dept of a CC Business is not very different from the FMD of any other business. Mostly Cash ins n cash outs. Whereas in Bank's FMD also has to handle TM - Treasury Management functions. And, bankers got a lot of tight rope walking to do - for meeting the mandatory segment-wise lendings - like Priority Sector, Direct Agri, Allied Activities.... Which are quota based. If these parameters are not met, they attract penalties. Such segment-wiser compliances are not there in CC business - as such - but the owner-Banks may stipulate their own internal allocated targets.

This broadly is in a nutshell. Considering the scope of this community/forum.

If someone is seriously interested in knowing the nitty gritties, one must be prepared to spend considerable time studying in a CC Head Office - AND - in the Head Office of a Bank to understand the differences between the two different businesses. Despite the common names like FMD n TM in both, they are not comparable in any sense.

And, such studies must last at least one year - to have a fairly good idea about these activities.

All the best if someone is interested to invest that sort of effort n time. And, get proper prior approvals to get into these highly monitored areas.

 

[thecard]

There are restrictions n compliances to be followed for doing CC business in our market. In the initial stages, it would be easy - but as the volume n complexity n reach grows exponentially, it is difficult to put it (the CC business) within the framework of banking - to comply with the guidelines. Hence, we see separate companies/firms being floated exclusively for CC business. For ex - SBI Cards, BOB Fin.... In such cases, these WOSC - wholly owned subsidiary companies - does not come under the BRA, IBA.... as they are not strictly Banks - legally speaking. Owned by Banks but functionally not banks. Like any other business, they get a loan-capital-working capital and have to pay a dividend to the owner banks.

How they operate is akin to our own individual overdraft current accounts - limit is notional n for operational control. Purely based on the total transactions value - which is treated as clean overdraft. The credits are the MDR commissions, POS Rents they get, and the monthly interests they charge on part-payments n EMIs, besides the promotional charges refunded by corporate tie ups. Like in any lending, sufficient provisions are made for bad n doubtful CC accounts. And, the charges incurred for all types of followup, recovery infra, n the operating costs like communications....

As the business cycles are monthly, there are quick monitoring tools to see, control n report the mismatch between the debits n credits - like in any other business cash-book style.

At the end of each month, depending upon the net, profit or loss, suitable managerial inputs are given to the operating teams to monitor n control.

Unlike housing loans or business loans (C&I, SIB, SME or agri) or vehicle loans - where assets are created n the repayment is relatively stable on expected lines, CC business is more riskier n therefore based on more discretion powers - at times looking very illogical or strange. Unlike the EduLoans - where refinance n subsidy benefits are given, CC business is not having that sort of luxury.

The total approvals - on a daily basis - are monitored closely. Daily/weekly/monthly inflows n outflows are strictly monitored. Seasonal changes - like Great Indian Shopping Festivals by Amazon, FK.... - are also factored in such monitoring.

This is like any other commodity businesses during the festive seasons or during calamities or down turn in business due to cycles or external factors.

The Funds Management Dept of a CC Business is not very different from the FMD of any other business. Mostly Cash ins n cash outs. Whereas in Bank's FMD also has to handle TM - Treasury Management functions. And, bankers got a lot of tight rope walking to do - for meeting the mandatory segment-wise lendings - like Priority Sector, Direct Agri, Allied Activities.... Which are quota based. If these parameters are not met, they attract penalties. Such segment-wiser compliances are not there in CC business - as such - but the owner-Banks may stipulate their own internal allocated targets.

This broadly is in a nutshell. Considering the scope of this community/forum.

If someone is seriously interested in knowing the nitty gritties, one must be prepared to spend considerable time studying in a CC Head Office - AND - in the Head Office of a Bank to understand the differences between the two different businesses. Despite the common names like FMD n TM in both, they are not comparable in any sense.

And, such studies must last at least one year - to have a fairly good idea about these activities.

All the best if someone is interested to invest that sort of effort n time. And, get proper prior approvals to get into these highly monitored areas.

Great! Thank you so much, sir. So, I can conclude that CC companies work on a virtual money pool based on the demand, they do not have to park money based on the limit of individual cards.

 

[prateekm03]

Great! Thank you so much, sir. So, I can conclude that CC companies work on a virtual money pool based on the demand, they do not have to park money based on the limit of individual cards.

Thanks for summing that up, was going through post and replies, but will read the whole answer in detail later on 😝

 

[Vasuki]

Credit card is nothing but an unsecured loan. Basically bank has to allocate capital for entire limit with 150% risk weight currently for credit card. However banks will insert a clause for unconditional cancellability of limit in the T&C which allows Bank to allocate capital for only 150% of outstanding limits of credit card. The capital to be allocated varies depending on whether the credit card account is standard or stressed.

If you are asking about asset liability mismatch credit card outstanding is a very small pie and it is also managed along with the overall treasury management

And Rbi has increased this last week 😂😂
Sbi says no issue no much impact

 

[Vasuki]

Great! Thank you so much, sir. So, I can conclude that CC companies work on a virtual money pool based on the demand, they do not have to park money based on the limit of individual cards.

Shhhhhhhhhhhh
150% is there if they issue 100 rs of cc
125% something for loan
& List is there .
Virtual money .. bank works on assumptions that even if bad happens it won't happen to few crores .
Cc portfolio is few thousand crores .
Its the corporate loans which hurt & not retails
Some they have to have in cash .
Its not virtual money its real but assumptions

 

[thecard]

Shhhhhhhhhhhh
150% is there if they issue 100 rs of cc
125% something for loan
& List is there .
Virtual money .. bank works on assumptions that even if bad happens it won't happen to few crores .
Cc portfolio is few thousand crores .
Its the corporate loans which hurt & not retails
Some they have to have in cash .
Its not virtual money its real but assumptions

Thank you for adding extra knowledge! I appreciate it. I said virtual in the sense that banks do not park money instead they do it with a separate company

 

[Vasuki]

Thank you for adding extra knowledge! I appreciate it. I said virtual in the sense that banks do not park money instead they do it with a separate company

Welcome for you postive understanding ..😎

 

[Yugi]

Thank you for the detailed answer @RAMESH BABU N, learnt very interesting things. Keep lending your wisdom to this community.