The banking regulator feels that the free credit card culture is leading to increasing instances of high indebtedness among credit card customers.

The RBI is drafting a comprehensive study on the credit card market and a best practices code for credit card issuers. It is also considering a proposal to ensure that the aggregate credit limits on all cards held by a customer do not exceed his or her ability to pay, banking sources said.

Banks currently sanction high credit card limits to their customers without taking into account credit limits provided by competing card issuers.

"The free culture is causing problems in the system. Banks and non-banking finance companies active in the credit card business are providing easy access to credit, which is making individuals over-leverage themselves. They offer customers credit limits much beyond their servicing capacity. The banking ombudsman is flooded with complaints on credit cards and banks' recovery practices,'' the sources said.

The RBI is likely to ask banks to put in place prudent credit assessment and credit scoring models in association with the Credit Information Bureau to deny any room to individuals from over-leveraging themselves.

"Banks will have to ensure that they issue credit limits after assessing the income, credit limits enjoyed on other credit cards and also the credit servicing capacity of customers,'' the sources said.

Apart from concerns over deployment of strong-arm tactics for recovery of overdues from individuals, the RBI is also worried that withdrawal of insurance benefits on credit cards as this leaves cardholders unprotected in the event of frauds.

When a lost or stolen credit card is used for making purchases by a fraudster, the card customer is made liable for the dues as there is no insurance cover on free cards.

Purchases made on lost cards are invariably listed as disputed transactions and until the matter is resolved, the affected customers are included in the defaulters' list. As long as the defaulter tag remains, such customers are denied other credit facilities including home loans.

The code would also make banks responsible for conducting background checking of people hired by their recovery agencies so that individuals with criminal background are not engaged.

The credit card head of a private bank said, "If the customer wants a free card, we have to withdraw some benefits including insurance cover. Banks decided to withdraw insurance cover provided to credit card customers owing to the rising insurance premium cost.''

The RBI study would draw from the practices in the UK, where the outstanding liability on credit cards is insured. Around 50 pounds is paid by every credit card holder and the balance insurance cost is borne by the card issuer.

Earlier, banks in India imposed an annual fee on cards ranging from Rs 900 to Rs 1,500. "In some cases, the fee was higher which covered the costs of providing add-on benefits like lounge benefits at airports and most importantly insurance benefits,'' said another private sector banker said.

The default rate on credit cards declined marginally to 9.94 per cent in 2006 from 11.55 per cent in 2002, but in absolute terms the total delinquencies have quadrupled to nearly Rs 7,000 crore (Rs 70 billion).