SC ruling decoded: Banks can charge you more for late credit card payments

The Supreme Court on December 20 overruled National Consumer Dispute Redressal Commission's (NCDRC) 2008 ruling that barred commercial banks from charging credit card holders over 30% per annum for late payments. This decision affects how banks can charge interest on credit cards. Let’s break down what happened and why it matters.

 

What Was the Original Rule?

Back in 2008, the National Consumer Disputes Redressal Commission (NCDRC) ruled that banks couldn’t charge credit card holders more than 30% interest per year on late payments. This was meant to protect consumers from being hit with sky-high interest rates. For instance, if you missed a payment or only paid part of your credit card bill, the most the bank could charge you in interest was 30% per annum.

 

“The benchmark prime lending rate declared by various banks, even after deregulation in India, varies from 10-15.50% per annum. In such circumstances, to contend that banks can charge an interest at the rate of 36-49% cannot be justified,” stated the NCDRC in 2008.

 

The national consumer court had in 2008 restrained banks from charging interest rates in excess of 30% per annum from the credit card holders for their failure to make full payments on due date.

 

What Did the Supreme Court Decide?

On December 20, 2024, the Supreme Court overturned that 2008 decision. This means that banks can now charge interest rates higher than 30% on late payments. A bench of Justices Bela Trivedi and Satish Chandra Sharma was hearing petitions by banks such as Standard Chartered Bank, Citibank, American Express, and Hong Kong and Shanghai Banking Corporation (HSBC), which questioned before the court whether the NCDRC had jurisdiction to fix a maximum ceiling on interest rates to be charged by the lenders from their credit-card holders for their failure to make payment on the due date.

 

Why Did the Banks Challenge the Rule?

The banks pointed out that the Reserve Bank of India (RBI) is the authority that regulates banking practices, including interest rates. They argued that the NCDRC’s ruling didn’t consider that higher interest rates are only applied to customers who miss payments, while those who pay on time can enjoy up to 45 days of interest-free credit. They also mentioned that running credit card operations involves various costs that need to be covered.

 

They basically told the court that while fixing the maxima of interest rate, the NCDRC has not taken into account the fact that the levy of (higher) interest is only on defaulting customers and a compliant customer gets an interest-free unsecured credit for approximately 45 days, and also various costs associated with the credit-card business.

 

What’s the Impact of This Ruling?

Higher Costs for Consumers: With the cap on interest rates removed, banks can now charge late payment interest rates above 30%. This could mean that if you miss a payment, the fees could be much higher than before.

 

"With the removal of the 30% cap, banks and financial institutions may have more flexibility in setting interest rates on late credit card payments.  This could lead to higher charges for consumers who miss payment deadlines, it also allows issuers to adjust rates based on market conditions and individual risk assessments," said Gauhar Mirza, Partner, Cyril Amarchand Mangaldas.

 

Flexibility for Banks: Banks now have more freedom to set interest rates based on market conditions and individual customer risk. For example, if someone has a poor payment history, the bank might charge them a much higher rate to offset the risk of them defaulting again.

 

Potential Revenue Boost for Banks: By being able to charge higher rates, banks could significantly increase their earnings from credit cards, especially from customers who frequently miss payments.

 

"Banks now have the flexibility to charge late payment interest rates higher than 30%. This can significantly boost their revenue from credit card operations, especially from high-risk customers. Banks can set interest rates that align with individual credit risks. Customers with poor payment histories may be charged higher rates, helping banks offset the risks associated with defaults. Banks can structure their credit card offerings more competitively without being bound by an arbitrary cap," said Mirza.

 

What does RBI have to say? 

While the RBI has instructed banks not to charge "excessive" interest rates, it does not set fixed rates. Instead, it provides guidelines that banks must follow, leaving the decision-making power to each bank's Board of Directors. This means that banks have the freedom to decide their own interest rates based on their business models and risk assessments.

 

 The RBI's ability to intervene in setting interest rates is limited. It operates under the Banking Regulation Act of 1949, which gives it the authority to oversee banks but does not mandate direct control over interest rates. Consequently, the RBI cannot be compelled to issue further instructions on this matter, as its role is more about providing a framework rather than micromanaging rates.

 

In its order, the NCDRC had 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 of interest varying from 36 per cent to 49 per cent per annum, in case of default by the credit-card holders to pay before the due date.”

 

Comparison with Other Countries

 

The NCDRC in its 2008 order compared India's credit card interest rates with those in other countries. For instance:

 

• Australia: Interest rates range from 18% to 24%.
• Hong Kong: Rates vary from 24% to 32%.
• Emerging Markets: Countries like the Philippines, Indonesia, and Mexico see rates between 36% and 50%.

 

The NCDRC argued that there was no justification for Indian banks to adopt such high rates, especially when they exceeded those in other countries. 

Example: Riya is a young professional living in Mumbai who recently got a credit card from a major bank. Her credit card allows her to spend up to Rs 50,000, and she enjoys the benefits, such as cash back on certain purchases.

 

Original Situation

When Riya first got her credit card, she learned about the NCDRC ruling that capped interest rates at 30% per annum for late payments. She felt relieved knowing that if she missed a payment, the most the bank could charge her in interest would be 30%. For example, if she had an outstanding balance of Rs 20,000 and missed her payment, the maximum interest she would incur over a year would be Rs 6,000 (30% of Rs 20,000).

 

New situation after the Supreme Court ruling

With the recent Supreme Court ruling, the 30% cap on interest rates was lifted. Now, if Riya misses a payment, the bank could charge her much more, potentially up to 40% or higher. If the bank decides to charge 40% interest on her Rs 20,000 balance, her interest would skyrocket to Rs 8,000 in a year.