SC permits banks to charge up to 49% interest on card payment defaults

New Delhi: The Supreme Court on Tuesday allowed MNC banks to charge hefty interest up to 49% on defaulted credit card payments, ending the respite that lakhs of card holders have had since September last year when the National Consumer Disputes Redressal Commission capped the penalty at 30%.
The SC stayed the apex consumer forum’s directive to banks not to charge more than 30% interest on defaulted payments on credit card purchases. The SC had last year refused to heed the appeal of banks against the NCDRC’s order. A Bench comprising Justices B N Agrawal, G S Singhvi and Aftab Alam on Tuesday suspended the relief to card holders on a plea by a coalition of foreign banks — Citibank, HSBC, American Express and Standard Chartered — that their business was suffering immensely because of the “unwarranted’’ cap on the quantum of penal interest.
Ironically, the plea of banks may have been allowed because of a lapse by the very same NGO ‘Awaz’ that was instrumental in getting the NCDRC order pegging the penal interest at 30% last year.
Though the bench had issued notice to the NGO four months ago, it has yet not put in its response, possibly helping the court to see merit in the argument of the banks that no penal interest rate, they were only following the guidelines issued by the RBI.
The banks teamed up to apprise the apex court of their compulsions to charge between 36% to 49% interest on defaulted payments on credit cards. “No bank as a credit card issuer would charge undue interest rate as, apart from the regulatory framework that applies, the market would not sustain the same by reason of competitive force,’’ Citibank said. In its application, filed through counsel Rupinder Suri, it said facility of credit cards could be availed of without any interest for a certain stipulated period and it was only after the expiry of that period that penal interest was levied on default of payments.
“The credit card holder is aware of the same at the time of applying for it. It is also relevant to note that credit card transactions de facto constitute unsecured credit availed of,’’ the bank said justifying the high interest rate permitted by RBI on defaulted payments.
The July 7, 2007 order of NCDRC had ruled that “charging of interest rates in excess of 30% per annum from credit card holders by banks for the former’s failure to make full payment on the due date or paying the minimum amount due, is unfair trade practices.’’
It had also said that penal interest could be levied only once for the period of default and should not be capitalised while terming the practice of computing interest on monthly basis as “unfair trade practice’’.
The banks justified the high interest rate on default payments by credit card holders by listing as many as 27 factors that included even the SMS alerts it sends to the card holders.
Even the cost of acquiring a new customer, that is the cost of calls made randomly by authorised call centres urging people to take credit cards, is also taken into account for realisation through charging of penal interest from an defaulting card holder.
“The National Commission has failed to appreciate that the rate of interest on defaulted or partial payments of credit card dues is determined by taking into consideration various factors, including the risks of default, and therefore, this commission may not determine the issue as to whether the interest at the rates of 36% to 49% per annum is excessive,’’ the banks said. Higher charge despite lower cost of fund
Prabhakar Sinha | TNN
New Delhi: Though cost of fund is falling, banks continue to charge very high interest rates—up to 51% per annum – on outstanding credit card amount. At present, banks are charging interest on outstanding amount at the range of Rs 2.5%-3.5% per month, which works out to be 34.5%-51% per annum.
In 2008, when interest rates were firming up, banks had increased the rate by around half a percentage point per month or by around 10 percentage point per annum.
In the last couple of months, cost of fund has declined. At present, banks are raising funds at around 8% from depositors. Even if the default rate of around 15% in the credit card segment is taken into account, the present interest rate (35% to 51%) is very high. In the developed market interest rate burden is around 15%-20%.
However, banks claim that cost of servicing a customer is high, as they don’t charge the interest rate during the first 50 days of a credit card purchase. But industry watchers say this is not correct. If you have even Re 1 outstanding left on the card in the previous payment cycle, the interest will be charged from the day one on the entire amount. So, you end up paying the high interest rate on the amount spent by the card from the day one.
CMD of a public sector bank said if RBI can ask banks to reduce lending rate, it can also tell them to lower the interest rates on credit card.