The Supreme Court today stayed the judgement of the National Consumer Commission, which had capped the interest rate chargeable on credit card holders at 30 per cent.
In September 2008, the Indian Banks’ Association, Standard Chartered Bank, HSBC and Citibank had appealed against the judgment and it was admitted for hearing. However, the matter was mentioned again in the court today as the commission’s order was due to be executed by February 13.
A bench headed by Justice B N Agrawal stayed the consumer commisison’s order. The apex court’s verdict would allow banks to levy any interest rate that they consider applicable to their credit card holders.
In their appeals, the banks asserted that they were following the guidelines of the Reserve Bank of India (RBI), which was the only authority to regulate the fixing of the interest. Therefore, the commission had no jurisdiction to pass an order directly to the banks.
| CREDIT BURDEN Annualised interest rates on credit cards | |
| Bank |
Range of rates(%) |
| ICICI Bank | 18.00-49.36 |
| HDFC Bank | 36.60-39.00 |
| Citibank | 18.00-42.00 |
| StanChart | 23.88-40.80 |
| HSBC | 33.00-38.40 |
| Note: The rates are higher for late repayments | |
On the contrary, consumer group ‘Awaaz’ that had moved the commission last year argued that the commission had failed to notice that the banks were charging more than 90 per cent if one took into account the interest on default combined with the hidden costs.
The central bank policy states that banks are free to determine rates of interest on non-priority sector personal loans, regardless of the size, without referring to the benchmark prime lending rate (BPLR). Some banks argued that the guidelines on rates and late repayment fees on credit cards were not clear.
“The RBI guidelines are not very clear on the legalities of credit card business. If we are asked to limit the maximum interest rate at 30 per cent, we will have to increase the annual fees on the card. The court has to take into account the fact that higher rates also ensure lower mis-selling and lower defaults,” a top executive at a large foreign bank said.
The prevailing interest even for unsecured finance fixed under the Money Lenders Act was below 20 per cent, the consumer group contended. Even after deregulation, BPLRs are in the range of 10-15.5 per cent for unsecured finance.
However, bankers said that although management costs on credit cards are almost similar to that of large secured credits such as home loans, they do not keep any collateral or security against credit card issuances. Moreover, the risk of delinquencies is much higher in the credit card business.
“We have adopted a tiered pricing approach. Over the past few months, based on customer behaviour, we have been offering varying pricing to them. The customer behaviour scores after six months of the customer coming on board are used,” said ICICI Bank.
“Our interest rates can be as low as 1.5 per cent a month for good customers. Based on good behaviour, a very significant portion of our card holders are now at a rate of below 2 per cent. Pricing is also offered at 2.75 per cent per month and 3.4 per cent per month for customers with lower behaviour scores, for various reasons,” added ICICI Bank.
Earlier, the bankers had raised concerns that capping the card rates would result in an unbearable hike in annual fees, which would make the business unviable.
“The banks would have to look at other income generation channels if the rates are capped at 30 per cent. The first alternative would be to hike annual fees. But even after that, banks will have to be prudent enough in managing their credit quality to protect margins,” said a credit card head at one of the biggest foreign banks here.
Most of the banks have recently raised their annual interest rates on credit cards citing a rise in risk of defaults in credit cards. The annualised interest rates on credit cards now go up to 50 per cent.
“In the absence of a concurrent technology to avoid misselling of cards, without hurting the business growth, the idea of a ceiling on interest rates is not feasible. India is still under-penetrated in terms of credit card holders,” the country head of a large foreign bank said.
At present, there are over 27 million credit card holders in India, with ICICI Bank being the largest issuer with a customer base of over 9 million. Foreign lenders such as Citibank and HSBC are two other major credit-card issuers in the country with customer bases at 3.7 million and 2.8 million, respectively.
ICICI Bank, which charges a minimum annual rate of 18 per cent on credit cards said about 50 per cent of the bank’s card holders were not charged any annual fee. The default rates on credit cards vary between 8 and 17 per cent at present. The bankers explained that delinquencies have been going up for the fact that a few large banks had started the practice of issuing free credit cards a few years back. This led the borrowers to spend extravagantly on cards.
