Supreme Court overrules consumer forum’s 30% interest rate cap on late credit card payments | Mint

The Supreme Court has overruled a 2008 decision by the National Consumer Disputes Redressal Commission (NCDRC) that capped the interest rate banks could charge on late credit card bill payments at 30% per annum, bringing relief to banks. 

A bench of Justices Bela Trivedi and Satish Chandra Sharma was hearing petitions filed by various banks including Standard Chartered Bank, Citibank, and Hong Kong and Shanghai Banking Corporation (HSBC). 

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, constituted an unfair trade practice. The ruling was in response to a petition by Awaz Foundation, an NGO.

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The banks then appealed this ruling in the Supreme Court. The Supreme Court initially refused to stay the order in 2009. However, it later granted a stay after the banks argued that not doing so would be prejudicial to them.

The NCDRC ruling

The NCDRC had also said in its ruling that penal interest could be levied only once for each period of default and should not be capitalised (added to the total cost). It said the practice of computing interest with monthly rests constituted an “unfair trade practice”. It said the Reserve Bank of India (RBI) had failed to regulate this practice adequately, allowing banks to set high interest rates.

The consumer forum noted that such practices could be considered unfair under the Consumer Protection Act. It underscored the need for regulatory oversight to prevent financial institutions from charging exorbitant interest rates that could exploit consumers, especially those in vulnerable financial situations.

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It highlighted that though some states had laws restricting money lenders from charging more than a certain interest rate, there were no such rules for banks and non-banking financial companies (NBFCs) at the national level.

The commission also compared credit card interest rates in various countries. It found that rates ranged from 9.99-17.99% in the United States and the United Kingdom, 18-24% in Australia, 24-32% in Hong Kong, and 36-50% in emerging markets such as the Philippines, Indonesia, and Mexico. It concluded that there was no justifiable reason to adopt the highest rates from smaller economies and emphasised the need to follow the more moderate rates of developed countries.

What the banks said

However, the banks argued that the NCDRC did not have jurisdiction to regulate their functioning, particularly on credit card interest rates, and said only the RBI had the authority to set guidelines on such matters. They argued that even with high interest rates (36-49% per annum), they made minimal profits, as much of the interest earned was used to cover costs associated with providing credit facilities, such as round-the-clock customer assistance, phone banking, and free alerts via emails and texts.

They said high interest rates were needed to cover the risks of default, ensure profitability, and ensure the availability of credit when offering various free services to cardholders. The banks also said capping interest rates could lead to reduced profits, which could potentially result in higher fees for other services or reduced availability of credit.

Note: The detailed written judgement is awaited.