Bangladesh Bank's decision to cap the interest rate on credit card came as a shock for the banking industry, especially those with a good exposure to this segment.

Earlier on May 11, the central bank issued a guideline on credit card operations and for the first time, set a limit on the interest rate on credit cards.

Banks can charge the highest interest rate of consumer loans plus 5 percent, meaning that the interest rate on credit cards would come down to 16-17 percent -- half the existing rate.

Currently, banks charge as high as 36 percent interest on credit card, while interest rates on consumer credit stand at 11-12 percent.

Bankers termed the BB move unrealistic and also detrimental to the country's digital vision that encourages cashless transactions.

Amid this situation, bankers called an emergency meeting last week to discuss the issue and decided to write to the BB through the Association of Bankers Bangladesh to reconsider the decision, according to Selim RF Hussain, managing director of Brac Bank.

They said they have to spend about 20 percent, such as 5 percent as cost funds, 5 percent for general provision (regulatory requirement), 5 percent for bad debt (minimum) and another 5 percent for other operating costs and promotional activities.

In addition, there are huge risks involved with credit card as it is fully collateral free.

Besides, banks have to make huge investments in infrastructure, marketing and other promotional activities for the credit card business, said Mashrur Arefin, additional managing director of City Bank.

For instance, City Bank spent Tk 60 crore to develop the infrastructure, including installation of point-of-sales machines across the country, for credit card transactions. The bank maintains a round-the-clock call centre for the credit card customers.

“We have to understand that credit card is not the same as other loan products.”

In India, the interest rates on credit card hover between 38 percent and 48 percent, and in Pakistan it is 35 percent, according to Arefin.

Even in developed countries where normal loans cost 2 to 5 percent, credit card costs at least 15 percent. Recently, Indonesia's central bank put a cap on credit card interest rates at 27 percent, he added.

“Credit card is an investment-intensive industry. The way the ceiling has been set is not sustainable for banks,” said Nazil A Chowdhury, head of consumer banking of Eastern Bank that has 1.25 lakh active credit cards.

However, a BB official concerned defended their move to cap the interest rate.

While the average lending rate came down to single digit for many loan products, it is 30 to 36 percent for credit cards.

“This high rate is very unusual and we have decided to cap the interest rate.”

There are nearly 9.5 lakh credit cards in the market, according to the BB. But the number of issued cards would be around 15 lakh in the market. Loan portfolio against the credit cards stands at around Tk 2,000 crore, industry players said.