The Supreme Court has brought relief to banks by overruling a 2008 decision of the National Consumer Disputes Redressal Commission (NCDRC) that capped the interest rate charged by banks on overdue credit card bills at 30% per annum.
A bench of Justices Bela Trivedi and Satish Chandra Sharma was hearing submissions from banks including Standard Chartered Bank, Citibank and HSBC petition.
In 2008, the NCDRC ruled that charging credit card holders annual interest rates in excess of 30% if they failed to pay in full on time or paid only the minimum amount due constituted an unfair trade practice. The ruling came in response to a petition by NGO Ahwaz Foundation.
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The bank subsequently appealed the ruling to the Supreme Court. The Supreme Court initially refused to stay the order in 2009.
NCDRC ruling
The NCDRC also said in its ruling that penalty interest can only be levied once per default period and should not be capitalized (added to the total cost). It said the practice of calculating interest on a monthly basis constituted an “unfair trade practice”. The report said the Reserve Bank of India (RBI) failed to adequately regulate the practice, allowing banks to set high interest rates.
The Consumer Forum noted that this practice may be considered unfair under the Consumer Protection Act. It highlights the need for regulation to prevent financial institutions from charging exorbitant interest rates and thus exploiting consumers, especially those with vulnerable financial circumstances.
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It highlighted that while some states have laws restricting moneylenders from charging fees above a certain interest rate, there are no such rules for banks and non-banking financial companies (NBFCs) at the national level.
The committee also compared credit card interest rates across countries. The survey found that the proportion in the United States and the United Kingdom is 9.99-17.99%, Australia is 18-24%, Hong Kong is 24-32%, and emerging markets such as the Philippines and Indonesia are 36-50%. It concluded that there was no justification for adopting the highest tax rates of smaller economies and emphasized the need to follow the more modest tax rates of developed countries.
What does the bank say?
The bank, however, argued that the NCDRC does not have the power to regulate its operations, especially with regard to credit card interest rates, saying only the Reserve Bank of India has the authority to lay down guidelines on such matters. They believe that even with high interest rates (36-49% per annum), their profits are minimal since most of the interest earned is used to cover the costs associated with providing credit facilities, such as round-the-clock customer assistance, telephone services, etc. business, and free alerts via email and SMS.
They said high interest rates are needed to cover default risks, ensure profitability and ensure the availability of credit while providing various free services to cardholders. Banks have also said capping interest rates could lead to lower profits, possibly higher fees for other services or a reduction in the supply of credit.
NOTE: A detailed written verdict is still pending.