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

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.