Low-cost credit cards for small firms to be rolled out: Report

The government is contemplating rolling out a scheme under which banks will issue credit cards with a ₹5 lakh limit to micro enterprises to help them meet immediate working capital needs at affordable interest rates. The scheme will include credit guarantee cover, a first for such a product, reported Financial Express.

Currently, credit cards come with an interest-free period of up to 30-45 days, which can differ across cards and banks. After the interest-free period, banks charge a 2-2.5% interest rate per month or a 25-30% interest per annum. Some banks charge even higher rates.

Addressing cash flow gaps for micro units

Small firms often face cash flow challenges, particularly with delayed payments from larger companies, sometimes stretching to 90 days or more. This can impact their ability to cover operational costs, pay suppliers, and manage payroll, potentially disrupting production cycles.

So, a scheme is being worked out following the budget announcement to introduce customised credit cards for micro enterprises registered on the Udyam portal. In the first year, 1 million such cards will be issued.

“The challenge is balancing the credit cycle, interest rates, and financial education for customers,” a senior official said. The government aims to avoid creating a significant liability and is exploring existing guarantee schemes to reduce interest rates.

The government is conscious of the fact that paying credit card bills fully in 30-45 days will become a problem when cash flow cycles in micro enterprises are 90 days or more.

So, it is discussing with banks to work out a mechanism whereby these small units only pay a lower interest rate for their outstandings beyond the interest-free period.

Guarantee backing to reduce costs

However, the government will not provide any direct subvention under the scheme to credit card providers.

“But a credit guarantee is something which we can cover so that the risk comes down and the losses come down for banks. So, the customer is given the benefit of pricing on that, and the interest rate is brought down to a level which is manageable to the customer,” another official said.

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