Banks can't charge credit cardholders in excess of 30%: Court

[suguhopes]

NEW DELHI: In what may appear to be a big relief to the hapless credit
card holders, the National Consumer Disputes Redressal Commission has
ruled that charging of interest at rates in excess of 30 per cent per
annum is an unfair trade practice.

Coming down heavily on the banks who charge ˜exorbitant interest rates
on one ground or the other, like the credit card holders failure to
make full payment on the due date or paying the minimum amount due,
the consumer court has ruled that penal interest can be charged only
once for one period of default and shall not be capitalized. Besides,
charging of interest with monthly rests is also an unfair trade
practice.

It may be noted here that currently banks are charging the credit card
holders interest ranging from 36 to 49 per cent pa for their default
in payments. But while Indians card users pay some of the highest
rates in the world, their American counterparts, for instance, pay
around 13 per cent only. In Australia also, rate of interest varies
from 18 to 24 per cent and in Hong Kong SAR from 24 to 32 per cent. In
the Philippines, Indonesia and Mexico, which are emerging markets, the
credit card interest rate varies from 36 to 50 per cent.

True, the default rates in mature markets like the US or the UK are
very low and the same is the case with the cost of funds, however, all
this still doesn't fully explain the high rates charged in India.

In our view, there is no justifiable ground for adopting the highest
rate of interest prevailing in smaller economies. Further, there is no
justifiable ground in not even attempting to follow what is prevailing
in developed countries,the court observed.

Holding the RBI responsible for the current state of affairs, the
court said, If the RBI is considered to be one of the watchdogs of
finance and economy of the nation and the prevailing credit conditions
are such as should invite its policy intervention, then, in our view,
there is no justifiable ground for not controlling the banks which
exploit the borrowers by charging exorbitant rates

The RBI has been issuing directions/circulars from time to time which,
inter alia, deal with the rate of interest which can be charged and
the periods at the end of which rests can be struck down, interest
calculated thereon and charged and capitalised.

It should continue to issue such directives. Its circulars shall bind
those who fall within the net of such directives. For such transaction
which are not squarely governed by such circulars, the RBI directives
may be treated as standards for the purpose of deciding whether the
interest charged is excessive, usurious or opposed to public policy.

Any interest charged and/or capitalised in violation of RBI
directives, as to rate of interest, or as to periods at which rests
can be arrived at, shall be disallowed and/or excluded from capital
sum and be treated only as interest and dealt with accordingly,the
court ruled.

The court, however, made it clear that the direction not to charge
interest in excess of a specific rate would not be applicable to the
past transactions.

N.Sukumar
Research Analyst