Supreme Court removes 30% interest cap on late credit card bill payments

RBI stated that while it has directed banks not to charge excessive rates of interest, it does not directly regulate the rates charged by banks

In a relief to banks, the Supreme Court on Friday set aside an order of the National Consumer Disputes Redressal Commission (NCDRC) that capped credit card interest rates at 30% per annum on late bill payments. The top court ruling has put an end to a 16-year-old case.

 

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.

 

 

The detailed judgment is yet to be out.

 

In 2008, the NCDRC had ruled that charging credit-card holders interest rates in excess of 30% per annum for failing to make the full payment on time, or only paying the minimum amount due, was an unfair trade practice.

 

However, banks argued that the advising interest rate is an occupied statutory field reserved by the legislature for the Reserve Bank of India (RBI) to regulate, which is being done by the central bank.

 

They 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. 

 

Meanwhile, the RBI had said that though it has directed banks to not charge excessive rates of interest, the policy is not to directly regulate the rates charged by the banks. Therefore, the RBI left the matter to the Boards of Directors of the banks. So, the RBI cannot be directed to issue any further instruction as it is a discretionary power conferred under the Banking Regulation Act, 1949.

 

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.”

 

The commission had also compared the interest rates of other countries, saying that Australia’s rate of interest varies from 18 per cent to 24 per cent. In Hong Kong SAR, credit card interest varies from 24 per cent to 32 per cent. In the Philippines, Indonesia, and Mexico, which are emerging markets, credit card interest rate varies from 36 per cent to 50 per cent. However, the NCDRC went on to hold that there is no justifiable ground for adopting the highest rate of interest prevailing in smaller economies.

 

Experts say 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. 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 Gauhar Mirza, partner, Cyril Amarchand Mangaldas.

 

Sanjay Gupta, managing partner-dispute resolution, SNG & Partners, who had conducted the matter for banks before the top court, said: “It is a welcome judgment passed by the Supreme Court today, and is a big relief for the credit card industry operating in the country.”