Credit Card: Bank has shrunk your credit card limit. These can be the reasons

As stated by SEBI, banks hold the right to analyse the credit limits of customers based on their spending and repayment data and further offer to increase or decrease the credit limit, depending on the case.

A customer with a credit limit of Rs 1 lakh spends about 30-40% of it and is considered to be a prudent and responsible user.

Over the past several weeks, bank customers have been raising complaints about their credit card limits being suddenly decreased. While many SBI customers have shared their complaints against the bank for taking such a sudden action without any proper reasoning, it has come to the fore that SBI is not the only one to take this action as many other banks, including HDFC Bank and RBL Bank, have also done it in the past. As stated by SEBI registered tax and investment expert, Jitendra Solanki, banks hold the right to analyse the credit limits of customers based on their spending and repayment data and further offer to increase or decrease the credit limit, depending on the case.

However, there are several factors due to which banks have lowered your credit limit.

Reasons why banks reduce credit card limit

1. Default cases: As stated by the Reserve Bank of India, the number of credit card defaulters has risen significantly by 1.94% at the end of March 2023, while credit card outstanding has also risen to Rs 2.10 lakh crore in March 2023, in comparison to Rs 1.64 lakh crore in March 2022. Considering the rise in defaulters, the delay in credit card payments affects one's credit score and thus can prompt banks to reduce the credit limit.

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2. Increasing delinquencies: In cases where banks observe credit card payment defaults for over three months or more, it raises serious concerns. According to a Transunion Cibil report, credit card payment defaults have increased in the quarter that ended in June 2023. Considering this, banks after observing an increase in delinquencies look forward to tightening their credit policies.

3. High utilisation ratio: Banks also observe the customer's credit utilisation ratio i.e., a proportion between the amount of available credit and the amount spent. For instance, a customer with a credit limit of Rs 1 lakh spends about 30-40% of it and is considered to be a prudent and responsible user. However, those with a high credit utilisation ratio of 70% and above become a matter of concern for banks and thus they can reduce the credit limit for such customers. This is usually because lenders consider customers with higher utilisation ratios as 'potentially riskier'.

4. Inactive cards: Customers who rarely use their credit cards can often witness their credit limit being reduced. Lenders generally earn when a customer uses a credit card. However, an inactive card seems of no benefit to them and thus they can reduce the credit limit and further increase the same for another active cardholder.

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