P.M.Bhat, Member, Mysore Grahakara Parishat writes
In a significant decision (III (2008) CPJ 62 (SC)) affecting millions of consumers all over the country, the National Consumer Commission has restrained credit card companies from charging higher than 30% annual interest. It has also ordered that penal interest can be charged only once for one period of default and shall not be capitalized. The Commission has also decreed that interest on credit card dues can be charged only on an annual basis and not on monthly basis..
The complaint against excessive interest charged by credit companies was filed by two NGOs from Gujarat and a consumer. Notices were issued to RBI and all the major credit card companies. RBI submitted that it had issued several notices to banks not to charge excessive interest, but admitted that it had not set any specific limit on the interest that can be charged. It claimed that consumer courts have no jurisdiction over RBI, but the National Commission dismissed this contention by noting that deficiency in service as defined by the Consumer Protection Act includes any shortcoming in performance which is required to be maintained by any current law. Banking Regulation Act, 1949 requires that RBI discharge certain functions in the public interest, with Sec. 35A mandating that RBI should restrain all banking companies from any conduct detrimental to the interest of the depositors. Since in the present case, RBI had not discharged this function properly, it could be proceeded against in a consumer court, the Commission held.
The credit companies submitted numerous arguments before the National Commission to justify the high rate of interest they are charging on their credit cards. They argued that in countries such as Philippines, Indonesia and Mexico, annual interest rates on credit cards are between 36% and 50%; in India, which is also an emerging nation like these, annual interest rates are just about the same ranging from 36% to 49%. But the National Commission did not agree with this argument. It said that in USA and UK, typical interest rates are between 10% and 18% while in Australia, the rates are between 18% and 24%. It added that there is no justifiable ground for adopting the highest rate of interest prevailing in the smaller economies and not attempting to follow what is prevailing in developed countries. Also, when the benchmark prime lending rate of banks in India is 10-15%, the Commission saw no justification on credit card interest of 36-49%.
Taking all factors into consideration, the National Commission ordered that credit card companies can only charge interest on an annual basis and not on a monthly basis, the annual rate of interest can not exceed 30%, penal interest in case of default can be charged for only one period of default and interest on penal interest (i.e., compounding of penal interest) is not allowed.
In light of Sec. 21A of the Banking Regulation Act, 1949, the National Commission decreed that these restrictions will not apply retroactively and so earlier cases in which excessive interest has been charged on credit cards can not be reopened to take advantage of the Commission's latest rulings. (According to Hindu Business Line of 4-5-06, the Supreme Court has struck down Sec. 21A of the Banking Regulation Act as violative of Article 14 (Equality Before Law) of the Constitution. We have been unable to verify this claim because of lack of citation. If Sec. 21A has indeed been struck down, earlier cases in which excessive interest has been charged on credit cards can be reopened to take advantage of the Commission's latest ruling.)
In its judgment, the National Commission came down hard on the functioning of credit card companies, saying "...this market has so far been mostly created, driven and operated by the banks and for the banks - with unsolicited and alluring offers of credit card facilities at the marketing front end and undisclosed, fine-printed sets of one-sided conditions of credit at the back end, couched in jargon and phraseology which even erudite scholars of the English language, law and finance would find rather obtuse and opaque."
In a significant decision (III (2008) CPJ 62 (SC)) affecting millions of consumers all over the country, the National Consumer Commission has restrained credit card companies from charging higher than 30% annual interest. It has also ordered that penal interest can be charged only once for one period of default and shall not be capitalized. The Commission has also decreed that interest on credit card dues can be charged only on an annual basis and not on monthly basis..
The complaint against excessive interest charged by credit companies was filed by two NGOs from Gujarat and a consumer. Notices were issued to RBI and all the major credit card companies. RBI submitted that it had issued several notices to banks not to charge excessive interest, but admitted that it had not set any specific limit on the interest that can be charged. It claimed that consumer courts have no jurisdiction over RBI, but the National Commission dismissed this contention by noting that deficiency in service as defined by the Consumer Protection Act includes any shortcoming in performance which is required to be maintained by any current law. Banking Regulation Act, 1949 requires that RBI discharge certain functions in the public interest, with Sec. 35A mandating that RBI should restrain all banking companies from any conduct detrimental to the interest of the depositors. Since in the present case, RBI had not discharged this function properly, it could be proceeded against in a consumer court, the Commission held.
The credit companies submitted numerous arguments before the National Commission to justify the high rate of interest they are charging on their credit cards. They argued that in countries such as Philippines, Indonesia and Mexico, annual interest rates on credit cards are between 36% and 50%; in India, which is also an emerging nation like these, annual interest rates are just about the same ranging from 36% to 49%. But the National Commission did not agree with this argument. It said that in USA and UK, typical interest rates are between 10% and 18% while in Australia, the rates are between 18% and 24%. It added that there is no justifiable ground for adopting the highest rate of interest prevailing in the smaller economies and not attempting to follow what is prevailing in developed countries. Also, when the benchmark prime lending rate of banks in India is 10-15%, the Commission saw no justification on credit card interest of 36-49%.
Taking all factors into consideration, the National Commission ordered that credit card companies can only charge interest on an annual basis and not on a monthly basis, the annual rate of interest can not exceed 30%, penal interest in case of default can be charged for only one period of default and interest on penal interest (i.e., compounding of penal interest) is not allowed.
In light of Sec. 21A of the Banking Regulation Act, 1949, the National Commission decreed that these restrictions will not apply retroactively and so earlier cases in which excessive interest has been charged on credit cards can not be reopened to take advantage of the Commission's latest rulings. (According to Hindu Business Line of 4-5-06, the Supreme Court has struck down Sec. 21A of the Banking Regulation Act as violative of Article 14 (Equality Before Law) of the Constitution. We have been unable to verify this claim because of lack of citation. If Sec. 21A has indeed been struck down, earlier cases in which excessive interest has been charged on credit cards can be reopened to take advantage of the Commission's latest ruling.)
In its judgment, the National Commission came down hard on the functioning of credit card companies, saying "...this market has so far been mostly created, driven and operated by the banks and for the banks - with unsolicited and alluring offers of credit card facilities at the marketing front end and undisclosed, fine-printed sets of one-sided conditions of credit at the back end, couched in jargon and phraseology which even erudite scholars of the English language, law and finance would find rather obtuse and opaque."
