The Supreme Court on Tuesday allows banks to charge annual interest rates of up to 49% on credit card holders, staying the order of National Consumer Disputes Redressal Commission which had fixed the upper ceiling of 30% on late payment dues or defaulting dues of credit card.
Hearing the plea of four foreign banks – Citibank, Hongkong and Shanghai Bank Corporation (HSBC), American Express Bank and Standard & Chartered Bank – a three member bench headed by Justice B N Agarwal stayed the earlier direction and allowed the banks to charge interest rates and penalty fee as per the terms and conditions of individual bank.
With this, banks are now free to charge interest rate more than 30% per annum i.e. applicable to their credit card holders until the final verdict comes out.
Prior to the verdict of NCDRC, banks used to charge an annualized interest rates of 36% to 49% on late payment dues, part payment dues and no payment dues.
The banks, in their plea, had mentioned over 20 reasons for charging higher rate of interest on credit card dues including an argument that says, ‘only Reserve Bank of India can set the cap of credit card interest rates, and a consumer forum can’t not pass any direction to the banks.
RBI in its credit guidelines has not clearly mentioned about late payment charges and other dues on credit cards while it has set the cap on other loans based on Benchmark Prime Lending Rate (BPLR), argued banks in their petition.
According to RBI guidelines, “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).”
‘If we are asked to limit the maximum interest rate at 30 per cent, we will have to increase the annual fees or any other charges on the card to prevent heavy losses, banks added.
The higher rate of interest is also for a large number of defaulters who don’t pay the dues on the credit card. Moreover, banks do not charges any interest for a certain stipulated period and charges are levied after expiring the grace period, the petition added.
Among other mentioned reasons for charging higher penalty rate, banks argued by showing the service centre charges for persuading people to take a credit card, cost of processing, cost for setting up a new card in operating system, cost of courier and embossing the card, cost of providing phone banking and internet banking services, cost of sending monthly statements, cost of waiving charges for service reasons, cost of marketing and promotional offers, and cost of rewards, loyalty programmes and many more.
In July last, the NCDRC had ordered the banks to set the upper limit of penalty charges on credit card dues to 30% which was challenged by the foreign banks in the court in September 2008.
The court had accepted the petition but at that time it had not passed any stay order against the consumer forum verdict as the ceiling was scheduled to be implemented by February 13. In reply to a second appeal, the court on Tuesday (Feb 03) stayed the order of the forum until the final decision comes out.
Earlier in last July, two consumer groups - Awaz and Jagrit Grahak had filed a petition in consumer forum challenging those high interest rates of banks.
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