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FOR a long time, consumer groups have been protesting against the high rate of interest charged by banks on unpaid credit card dues (revolving credit), and have been demanding that the banking regulator put a cap on the maximum rate of interest chargeable. Unfortunately, the only action taken by the RBI in response to complaints was to issue a circular asking banks not to charge interest at rates that could be called usurious. However, since the regulator did not specify the percentage at which the interest rate could be termed usurious, the circular really served no purpose. In fact in the last week of June and the first week of July, some banks even increased further the rate of interest charged on unpaid credit card dues. Fortunately, the apex court has now stepped in and said that banks are not to charge interest beyond 30 per cent per annum on unpaid amounts of credit cards. Thirty per cent per annum is still high, but it is certainly an improvement on 42 to 50 per cent charged by some banks. In fact, the credit card companies argued before the apex court that their rates of interest were high because of the high rate of default and also non-availability of credit histories of individual consumers. In response to this, the apex court pointed out that the average rate of interest on bank loans was around 15 per cent. Even if an additional 15 per cent was added to this to take care of the risk and the operational costs of credit card loans, the rate of interest cannot exceed 30 per cent. The court’s verdict on the issue was in response to a petition filed by consumer groups Awaz of Ahmedabad, Jagrut Nagrik of Baroda and Pradeep Kumar Thakur of Delhi. The two main issues that the court considered were: (a) whether the banks can charge credit card users’ interest at rates ranging from 36 per cent to 49 per cent per annum if there is any delay or default in payment within the specified time; and (b) whether interest at such rates amounts to charging usurious rates of interest. After a detailed scrutiny of the submissions made by various foreign banks (HSBC, American Express, Citibank and Standard Chartered) and the Reserve Bank of India, the National Consumer Disputes Redressal Commission observed: "In our view, charging of interest ranging from 36 per cent to 49 per cent per annum is exorbitant and amounts to exploitation of the borrowers/debtors, and is usurious" The commission next considered the question of whether the borrower or the debtor can be left to the mercy of the lender or the bank on the ground that it is a free market economy, or whether consumers needed protection. In a well-reasoned and detailed order explaining the need for protecting the debtors from the banks, the court said even in a deregulated economy, exploitation of the borrower or the debtor is prohibited and is considered an unfair trade practice. Second, when the benchmark prime lending rate declared by various banks varies from 10 per cent per annum to 15.50 per cent per annum, there was no justification for charging interests at the rate of 36 to 42 per cent. Third, there was also no justification for treating money lenders and banks differently. While there were a number of regulations prohibiting money lenders from charging interest beyond a particular limit, there was no such limit placed on banks. There was, therefore, need for protecting the credit card holder or the debtor. It then considered whether charging such high rates of interest amounted to unfair trade practice. To determine this, it took into consideration the marketing tactics indulged in by the banks to sell the cards and then to make the consumer spend, and also the fact that the credit card holders had no bargaining power vis-`E0-vis the interest rates. It said any term or condition that requires the consumer to pay a disproportionately high sum as compensation for failing to fulfil his obligation would amount to an unfair trade practice. In the end it made it clear that charging of interest in excess of 30 per cent per annum constituted an unfair trade practice, and directed banks not to indulge in such practice. However, its directions would not be applicable to past transactions and it would not reopen them, the commission said. It also told the banks that penal interest can be charged only once for one period of default. Hopefully, the regulator will take follow-up action on the order of the highest consumer court in the country and ensure that banks comply.
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