Introduction
Bank offers the credit card facility, well known consumer commodity, which often brings banks to the doorstep of consumer courts as defendants. The Hon’ble National Commission in Awaz, Punita Society, Ambawadi recently decided one such important petition on the issue of rate of interest, & Ors Vs. Reserve Bank of India & Ors[1] The article examines the role of RBI as defendant before Consumer Forums as well as whether the same qualifies any relief for exorbitant rate of interest charged on ordinary consumers using credit card in light of the judgment alone.
A. Issues
The issues under consideration were:
(a) Whether the Reserve Bank of India (“RBI”) who has been impleaded as defendant is required to issue any circular or guidelines prohibiting the Banks / Non-Banking Financial Institutions / money lenders from charging interest above a specific rate?
(b) Whether banks can charge the credit card users interest at rates ranging from 36% to 49% per annum, when there is any delay or default in payment within the time specified?
(c) Whether interest at the above-stated rates amounts to charging usurious a rates of interest?
B. Unfair Trade Practices in context of RBI
A complaint under the Consumer Protection Act, 1986 (“Act”) to curb unfair trade practice(s)[2] adopted by the banks is maintainable. Section 2(1)(o) of the Act defines “service” means service of any description which is made avail¬able to potential users and includes, but not limited to, the provision of facilities in connection with banking, financing but does not include the rendering of any service free of charge or under a contract of personal service;”
The aforesaid sub-section would establish beyond doubt that if the service provided by the bank in connection with banking facilities is deficient, then it would be ‘service’ as contemplated under the Act and any dispute pertaining to such service would be governed under the Act. Hence, if there is any unfair trade practice on the part of banks, the provisions of the Act would be applicable and the banks can be directed, as provided under section 14(1)(f), to discontinue such unfair trade practice and not to repeat them. Therefore, if the Banking Regulation Act, 1949 requires that the RBI shall discharge certain functions in the public interest and the RBI does not discharge such functions, it would amount to unfair trade practice.
C. Banks Charging Exorbitant Interest Rate
Prime lending rates haven’t gone up but banks are hiking rates on credit cards. Indian card users pay some of the highest rates in the world. Apparently, one in every ten cardholder in India defaults while one in 25 does in the US. Mostly, credit card interest in the United States of America / United Kingdom, is “variable”. Only a very small segment of the credit cards in these markets today carry a “fixed” rate. In India, the credit card market operates on a “fixed” rate basis. Typically, rates currently vary from 35% to 42% annualized (APR). India faces most of the same challenges as mentioned in the above emerging market scenario examples of the Philippines, Indonesia, and Mexico. Further, interest on credit card dues, and late payment charges, are levied only after a customer fails to pay the dues, or opts to pay only a certain amount of his dues, within the stipulated, interest free credit, period. Again based on the customer’s usage pattern, history of defaults (or otherwise) and the period of time for which he has been a credit card customer, the rate of interest applicable would vary.
D. Consumer debtors at the mercy of the bank
Firstly, as noted above, even in any free economy/deregulated economy exploitation of the borrower/debtor is prohibited and is considered to be unfair trade practice. Free economy would not mean license to exploit the borrowers / debtors by taking advantage of their basic needs for their livelihood. This cannot be permitted in any civilized society – maybe a de-regulated free market economy. Even in a de-regulated free market economy, such as America, the maximum rate of interest charged on credit cards is 13% p.a. Secondly, the Benchmark Prime Lending Rate (BPLR) declared by various banks even in after de-regulation in India, varies from 10% p.a. to 15.50% p.a. In that set of circumstances, to contend that banks can charge interest at the rate of 36% to 49% cannot be justified.
E. Role of the RBI in Protecting Interest of Consumers
For this purpose, it is pertinent to refer to section 35-A of the Banking Regulation Act, 1949 which provides as under:
“35-A. Power of Reserve Bank to give directions.—(1) Where the Reserve Bank is satisfied that –
(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or
(c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.
(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or canceling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.”
The Apex Court and the learned Counsel have interpreted the aforesaid provision for the parties have relied upon the decision of the Apex Court in the case of Central Bank of India Vs. Ravindra & Ors[3] . From the judgments it is apparent that:
(a) The Banking Regulation Act, 1949 empowers the Reserve Bank to lay down the policy in the public interest and it has binding effect on the banks. The Reserve Bank of India is entitled to give directions as to rate of interest to be charged and other terms and conditions on which advances or other financial accommodation may be made.
(b) The power conferred by sections 21 and 35-A of the Banking Regulation Act, 1949 is coupled with the duty to act. The Apex Court considered the RBI as a watchdog of finance and economy of the nation.
(c) Charging of interest should be reasonable. Further, penal interest can be charged only once for one period of default and, therefore, cannot be permitted to be capitalized. It would be opposed to public policy.
(d) The Court has specifically stated that unscrupulous banks may resort to charging of interest even on monthly rest. Therefore, required to be clarified that such unscrupulous banks should not be permitted to charge interest on credit cards on monthly rests.
(e) The Court has observed that most of the banks press into service long- running documents wherein the borrowers fill in the blanks, at times without caring to read what has been provided therein, and bind themselves by the stipulations articulated by the best of legal brains. In our view, such practice also would be an unfair trade practice.
There was no response of RBI on this issue except to say that with regard to rate of interest RBI has deregulated the same. In our view of the Hon’ble Commission, de-regulation is one thing but permitting the banks to charge excessive/usurious rates of interest would be quite different and it would be in clear violation of public policy.
1. 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% to 49% p.a., in case of default by the credit card holders to pay amount before the due date.
2. It is also to be stated that the RBI itself has issued various circulars that banks should not charge usurious rate of interest. However, it has failed to specify what would be termed by it as usurious rate of interest.
The RBI refuses to define what is usurious / excessive rate of interest, despite various circulars issued by it directing the banks not to charge usurious rate of interest. Credit card holders have no bargaining capacity except not to accept the facility of credit card. Secondly, for having credit card there is all throughout inducement by the banks by various marketing tactics. So, if a condition requires a consumer to pay disproportionately high sum as compensation if he fails to fulfill his obligation, it would amount to unfair trade practice.
F. Can Consumer Courts Scrutinize Rate of Interest of Banks
A contention has been raised on the basis of section 21-A of the Banking Regulation Act, 1949, which provides that no court shall reopen a transaction between the banking company and its debtor on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive. However, in the present case, the Consumer Courts are not reopening any transaction, which has taken place between the bank and the credit card holders. But under the provisions of the 1986 Act, the Consumer Fora are required to decide whether a bank has adopted any unfair trade practice as defined under section 2(1)(r)(i). If it has adopted any unfair trade practice, section 14(1)(f) of the Act specifically empowers the Consumer Fora to give a direction to the bank / banks to discontinue such unfair trade practice and not to repeat it. The section, inter alia, reads as under:
Conclusion
For the foregoing reasons, the take away of this discussion is:
(i) Charging of interest at rates in excess of 30% p.a. from the credit card holders by banks for the former’s failure to make full payment on the due date or paying the minimum amount due, is an unfair trade practice.
(ii) Penal interest can be charged only once for one period of default and shall not be capitalized.
(iii) Charging of interest with monthly rests is also an unfair trade practice.
Hence, the banks are directed not to indulge in the aforesaid unfair trade practices or repeat them. The Consumer For a made it clear that the direction not to charge interest in excess of a specific rate would not be applicable to the past transactions and that we are not reopening the same. Considering the aforesaid factors, in our view, charging of interest in excess of 30% shall be considered usuries rate of interest and that if such rate of interest is charged it would amount to unfair trade practice.
[1] Complaint Case No. 51 of 2007
[2] Section “2(1) (r) “unfair trade practice” means a trade practice which, for the purpose of promoting the sale, use or supply of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practice including any of the following practices, namely, …..”
[3](2002) 1 SCC 367
