Awaz Punita Society vs. Reserve Bank Of India And Ors; “How Much Interest A Credit Card Company Can Charge?”

Credit card is an amazing tool for the lenders as well as for its users to avail benefits and advancing digital payments for the people. It helps in providing in ease of making payment in a digital banking system that is flourishing in India. Though a Credit Card is good but in times Banks/Lenders can become unjust and unfair in determining and levying interest rate. This can be a bone of contentions for the Debtor/Borrower. A similar controversy has been discussed by the Consumer Redressal Forum on how much interest rates can be charged on a credit card? Whether RBI has the Power to form Regulation? Is the decision of charging is free because of de-regulation policy followed by India?

The Issue 

The aforesaid case is a Revision Petition before the National Consumer Dispute Resolution Commission. The dispute revolves on the fact that can Credit Card Company lend with an Interest rate ranging from 35 to 49 percent. The Issue further escalates on the determination of other factors, whether RBI has any circular or guideline in determining  Interest rates upon which the company can levy such rates? Can Consumer Dispute Resolution Tribunal have the jurisdiction in hearing such Disputes which are related to Banking and Finance? If yes, then what will be the criteria to discuss or adjudicate on this issue?

Is Consumer Forum Is the Appropriate Authority?

One of the main reasons for Consumer Protection Act, 1986, is the right to be informed of the quality, quantity, potency, standard and price of the good to and to protect the consumer against the unfair trade practices. Section 6(b) gives the authority to the Central Council to promote and protect the rights of the consumer against unfair trade practice. Similarly, Section 14(1)(f) of the Act gives power to the Consumer Forum to direct the traders and service providers to discontinue an unfair or restrictive trade practice or not to repeat them. Therefore, Consumer Forum has jurisdiction in cases of Unfair Trade practices related to Banking.

To understand the whether levy of Interest Rates can come under unfair trade practices, we need to understand what the Consumer Protection Act defines Unfair Trade Practice. Under Section 2(1)(r) :

2(1)(r) unfair trade practice means a trade practice which, for the purpose of promoting the sale, use or supply of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practice including any of the following practices, …..’

Further Section 2(1)(o) explains :

2(1)(o) service means service of any description which is made available to potential users and includes, but not limited to, the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or lodging or both, housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service;

To further its scope, a Consumer Forum can also direct in cases related to a deficiency in services which can be understood as provided in Section 2(1)(g):

deficiency means any fault, imperfection, shortcoming or inadequacy in the quality, nature, and manner of performance which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service;

Therefore, pertaining to the above provisions if, services related to banking are deficient then a consumer can bring a dispute related to the deficiencies in Banking and the case will be well within the Jurisdiction of the Consumer Protection Act, 1986. Thus consumer forum has the power to direct such banks under Section 14(1)(f) to discontinue such unfair trade practice and not to repeat them.

How Levying of high-Interest Rates be an Unfair Trade Practice?

Levying of High interest is the discretion of the Banking Company to determine but the issue in his case is can the Credit Card Company levy such a high Interest of 36 to 49 percent on credit card. The following are the arguments that explain the core of this issue:

  • The Cost incursion on credit cards.

The Respondent Bank ‘HSBC’ in the case provided a detail report on the cost incursion behind the Rate of Interest levied in Credit Card. It is dependent upon several factors, including the cost of funds to the credit card issuer, and the risks to the credit card issuer and the costs associated with the business of credit cards and the stage at which a particular market is. The element of profit in the interest rate ranges between 2 percent to 3 percent, which by no stretch of imagination constitutes an unfair trade practice. The Respondent added with other cost related to infrastructure and associated costs such as the Customer call centers to address prospect and customer queries,  On an average, it receives and deals with 40,000 e-mails and 60,000 letters per month in relation to credit cards. Approximately 7500 in terms of employees with regard to a credit card customer acquisition, customer support and maintenance and servicing, which requires the proportionate infrastructure in terms of office space, amenities, infrastructure, and equipment.

The Commission did not agree with the argument of HSBC on the grounds that there is no rule or regulation available in the public domain of enforcing or disclosure by any bank as to what its best-case scenario of determining the credit card interest rates will be. If a broad outline of any mechanism is set up by a bank like the HSBC for determining details which are available in the public domain, some evaluation for the excessive rates of interest charged by the banks can be brought up into it. In short, even from these detailed contentions, purporting to be discerning, in the face of comparative immaturity of the Indian credit card market, there is no way of assuring whether the debtor/borrower is, in the ultimate analysis or left at the mercy of the bank/money lenders.

  • It is a Part of Free trade and de-regulated markets to determine.

Another argument put forward is that in free trade and unregulated markets like in case of credit card market it should be left to be scrutinized by the Banks to decide its pricing and levying of interest rates but does this guarantee the protection to its consumers. It was noted that in other free and un-regulate economies the exploitation of the borrower is prohibited and is considered as an unfair trade practice. The free economy does not give license to exploit the borrower and taking advantage of no regulations to protect their interests. In another context, a free economy does not mean a de-regulated economy. In fact the freer the economy, the stronger is the institutional regulatory framework and effective the enforcement of the independently administered regulatory practices. De-regulation in the context of a so-called in an emerging economy like India essentially means withdrawal of the State and its instrumentalities from directly prescribing the market regulations and also their enforcement by the same State and its instrumentalities.

If the credit card market in India is not mature the banks with unsolicited offers of credit card set one-sided conditions of credit which would rather damage the principles of law and finance. Even in an un-regulated free market economy, such as America, the maximum rate of interest charged on credit cards is 13 percent per annum so does it justify the exploitation practiced in India. The RBI sets a Benchmark Prime Lending Rate (BPLR) and declared by various banks even in after de-regulation in India, varies rates from 10 percent per annum to 15.50 percent per annum is levied. In these circumstances, to contend that banks can charge interest at the rate of 36 percent to 49 percent cannot be justified.

  • Scope of Unfair Trade Practice in other Foreign Countries.

In the U.K it has codified to some extent the Unfair Trade Practice in the Halsbury’s Laws of England  Vol.9(1), page 547, para 793, 4th Edition (Reissue), which reads as under:

793. Unfair terms; in general: For the purposes of the Unfair Terms in Consumer Contracts Regulations, 1994, and subject as follows, the unfair term means any term which contrary to the requirement of good faith causes a significant imbalance in the parties rights and obligations under the contract to the detriment of the consumer. An assessment of the unfair nature of a term must be made taking into account the nature of the goods or services for which the contract was concluded and referring, as at the time of the conclusion of the contract, to all circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent.

In determining whether a term satisfies the requirement of good faith, regard must be had in particular to the following matters:

    1. the strength of the bargaining positions of the parties;
    2. whether the consumer had an inducement to agree to the term;
    3. whether the goods or services were sold or supplied to the special order of the consumer; and
    4. the extent to which the seller or supplier has dealt fairly and equitably with the consumer.

The said Volume provide Indicative and illustrative list of terms which may be regarded as unfair. One of the unfair terms in sub-para. (5), of the said Volume, is: ‘requiring any consumer who fails to fulfill his obligation to pay a disproportionately high sum in compensation.’

Thus, from the above principle set in the U.K, an Unfair Trade Practice has been properly defined which protect the exploitation of the consumers. The terms are considered in the U.K by the Director General of Fair Trading every year on what will be considered to be an unfair trade practice and prepare a list in such form and manner. The RBI in this case also has been empowered under Section 35A of The Banking Regulation Act, 1959 which has been left in absolute discretion in terms.

Whether RBI has the Power to form Regulation on determining Interest on Credit Card?

The RBI is considered as the watchdog of finance and economy in monetary policy in the nation. The RBI has the power to formulate rules and regulations as per Section 35A of the Banking Regulation Act, 1959 and also have the power to give directions. Section 35A is defined thereunder :

35A. Power of Reserve Bank to give directions.–(1) Where the Reserve Bank is satisfied that in the public interest; or (aa) in the interest of banking policy; or

    • to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or
    • to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company, in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

(2) The Reserve Bank may, on a representation made to it or on its own motion, modify or cancel any direction issued under Sub-section (1), and in so modifying or canceling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have an effect.

Section 35A has been described by the Apex Court Judgment Central Bank of India v. Ravindra and Ors. [AIR 2001 SC 3095]  that :

The Banking Regulation Act, 1959 empowers the Reserve Bank, on it is satisfied that it is necessary or expedient in the public interest or in the interest of depositors or banking policy so to do, to determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular and when the policy has been so determined it has a binding effect.  Section 35A also empowers the Reserve Bank of India in the public interest or in the interest of banking policy or in the interests of depositors (and so on) to issue directions generally or in particular, which shall be binding.  Section 35A also empowers the Reserve Bank of India in the public interest or in the interest of banking policy or in the interests of depositors (and so on) to issue directions generally or in particular, which shall be binding.

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 and capitalized thereon. 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.

The RBI has in the year 2014 has compiled a Master Circular on Credit Card, Debit Card and Rupee Denominated Cobranded Prepaid Card operations of banks which now comes in the ambit of the regulator’s authority as per Section 35A of the Banking Regulation Act, 1959.

What Is the Extent of Interest Rate That Comes Under Unfair Trade Practice?

The real question of whether high rates of 36 to 49 percent are justifiable in any manner. It has been previously discussed that ‘if a condition requires a consumer to pay disproportionately high sum as compensation if he fails to fulfill his obligation, it would amount to unfair trade practice.

For this purpose, we are referring to bank-wise lending rates for the advances for the quarter ending 2008, published by RBI:

  Minimum Maximum
BPLR for public sector banks 12.52 13.25
Demand Loans(maximum Rate) 13.75 17
Demand Loans (minimum rates) 6.25 13
Prime Lending Rate (PLR) 10 15.50
Term Loan 7.50 14.50

Thus from the aforesaid table, it is apparent that the average rate of interest on any kind of loan is up to 15 percent. Even if we add an additional 15 percent per annum as additional costs for recovering the amount from the credit card holders, then also the rate of interest cannot exceed 30 percent. Apart from charging of interest, the banks are also charging a commission from the traders or the service providers, if the items are purchased or the services are availed of from such traders or service providers, using credit cards. Still, it can be well understood that the interest is unfair which is levied between 36 to 49 percent.

  • Limitation

Even if an action by Banks on levying of high interest is termed as unfair it is limited by Section 21 of the Banking Regulation Act, 1949. Section 21 does not allow to reopen any transaction which has been settled between the Bank and its customer. The provision reads thereunder :

Rates of interest charged by banking companies not to be subject to scrutiny by Courts.– Notwithstanding anything contained in the Usurious Loans Act, 1918 (10 of 1918), or any other law relating to indebtedness in force in any State, a transaction between banking company and its debtor shall not be reopened by any Court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.

In this case, the Commission was bound not to reopen any transaction, which has taken place between the bank and the credit card holders. But it is well settled that under Consumer Protection Act, 1986, the Consumer Forum can decide whether a bank has adopted any unfair trade practice as defined under Section 2(1)(r)(i). The Banking Regulation Act, 1959 empowers the Reserve Bank to lay down the policy in the public interest and it has a binding effect on the banks.

Conclusion

For the foregoing reasons, it is directed as under:

  1. Charging of interest at rates in excess of 30 percent per annum from the credit card holders by banks for the formers failure to make full payment on the due date or paying the minimum amount due, is an unfair trade practice.
  2. Penal interest can be charged only once for one period of default and shall not be capitalized.
  3. Charging of interest with monthly rests is also an unfair trade practice.
  4. Hence, the banks are directed not to indulge in the aforesaid unfair trade practices or repeat them.

Image Courtesy: pymnts.com 

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