NATIONAL
CONSUMER DISPUTES REDRESSAL COMMISSION
1. “Awaz”,
Punita Society, Ambawadi,
Ahmedabad – 381 006
(Also at:
16, Satyadeep Apartments,
9/300, Amritpuri-B,
East of Kailash,
2. “Jagrut Nagrik”,
Regd. Office: Gendi Gate, Complainants
3. Pradeep Kumar Thakur
13, Satyadeep Apartments,
9/300, Amritpuri-B,
East of Kailash,
Versus
1. Reserve Bank of
Shaheed Bhagat Singh Marg,
Mumbai – 400 001
2.
Banking Corporation Ltd. (HSBC),
52/60,
Mumbai – 400 001
3. American Express Bank Ltd., Opposite
Parties
A-A1-A2, Enkay Centre,
Udyog Vihar, Phase V,
Gurgaon – 122 016
4. Citibank, N.A.,
Citibank Card Centre,
766, Anna Salai,
Chennai – 600 002
5. Standard Chartered Bank,
Credit Card Division,
3rd Floor,
9/10, Bahadur Shah Zafar Marg,
DCM Financial Services Ltd.,
75, Amrit Nagar, NDSE Part I, Petitioner
New Delhi-110 003
Versus
1. Mukesh Rajput,
Ganeshpura, District – Morena,
At Present – Vijay Nagar,
Gadaipura,
Respondents
2. Chhabiram Singh Dhakad,
Prop. Vikram Financial Services,
Ashish Bhawan, Jayendraganj Laskar,
D-4, Vikram Villa, Chetakpuri,
BEFORE:
HON’BLE MRS. RAJYALAKSHMI RAO, MEMBER
HON’BLE MR. ANUPAM DASGUPTA, MEMBER
C.C. No. 51 of 2007
Ms. Indu Malhotra, Senior Advocate as
Amicus Curiae with Mr. Abhinav Agnihotri, Advocate
Mr. J. K. Mittal, Advocate as Amicus Curiae
For the Complainant: Mr.
Mayur R. Shah, Advocate
For
Opp. Party No.1: Mr. Jaideep
Gupta, Senior Advocate with
(RBI) Mr. H. S.
Parihar and Mr. K. S. Parihar, Advocates
For Opp.
Party No.2: Mr. Sanjeev Puri,
Senior Advocate (HSBC) with
Mr. Sanjeev Malhotra & Pranav Vyas,
Advocates
For Opp.
Party No.3: NEMO
(American
Express
Bank)
For Opp.
Party No.4: Mr. Altaf Ahmed, Senior
Advocate
(Citibank) with Mr. R.S. Suri, Mr.
Rahul Malhotra,
and Mr. Gurinder Suri, Advocates
For Opp.
Party No.5: Mr. Sanjay Gupta,
Advocate with (Standard Chartered Mr. Ajay Monga and Mr. Ateev Kumar, Bank) Advocates
R.P. No. 1913 of 2004
Amicus Curiae with Mr. Abhinav Agnihotri,
Advocate
Mr.
J. K. Mittal, Advocate as Amicus Curiae
For the RBI: Mr. Jaideep Gupta, Sr. Advocate with
Mr. H. S. Parihar and Mr. K. S.
Parihar,
Advocates
For
Respondent
No.1: Mr. Prem Kumar Chugh, Advocate
Dated
M.
B. SHAH, J., PRESIDENT
In the aforesaid complaint and
revision petition, the questions, which require consideration are:
(1) Whether the Reserve Bank of
At this stage itself, it needs to be
noted that, on the one hand, the rapid expansion of banking facilities and of
access to credit facilities and on the
other hand, it has led, as a result of the aggressive marketing practices
adopted, especially, by the banks, which induce the unsuspecting customers to
take loans, in one form or the other, for purchasing consumer goods and
durables even when they are not quite needed. This makes these consumers
debtors forever. Such indebtedness results in constant tension to repay the
loans and the “EMIs” – at times well beyond the borrowers’ / debtors’ repaying
capacity. The ill effects of unaffordable EMIs are now being highlighted in the
print and other media almost daily. In the case of motor vehicle loans, for
example, the debtor / borrower is under constant tension that if he fails to pay
one or two instalments, he would receive threats from the so-called “recovery
agents” of
the banks. The RBI has permitted the banks to appoint “recovery agents” on contract, without
perhaps fully appreciating the implications that these “recovery agents” are
usually musclemen, employing whom increases nothing but goondaism.
(2)(a) Whether banks can charge the
credit card users interest at rates ranging from 36% to 49% per annum if there
is any delay or default in payment within the time specified?
(b)
Whether interest at the above-stated rates amounts to charging usurious rates
of interest?
In
our view, prima facie, charging of interest at rates ranging from 36% to 49%
p.a. is exorbitant and amounts to exploitation of the borrowers / debtors and
is usurious.
Oral Submissions
Whether the RBI can issue any directions?
(a) Ms. Indu Malhotra, learned
senior counsel appearing on behalf of the complainants as amicus curiae, has
submitted that charging the credit card holders interest at the rates of 36% to
49% p.a. for their default in payment is, on the face of it, usurious. She has
referred to various circulars issued by the RBI wherein it is acknowledged that
the RBI has been receiving many complaints with regard to banks charging
excessive rates of interest and that by these circulars the RBI has directed
the banks not to charge such high rates of interest. She has further submitted
that considering the prime lending rates fixed by various banks, it is the duty
of the RBI to issue a circular directing that interest should not be charged at
rates far beyond a reasonable limit.
(b) As against this, Mr. Jaideep Gupta, learned
senior counsel appearing on behalf of the RBI has submitted that the RBI has
already directed the banks not to charge excessive rates of interest. He has,
however, clarified that at present the policy of the RBI is not to directly
regulate the rates of interest charged by the banks and, therefore, the RBI has
left this matter, subject to the aforesaid advisory, to the Boards of Directors
of the banks. Hence, the RBI cannot be directed to issue any further
instruction as it is a discretionary power conferred under the Banking
Regulation Act, 1949.
(c) Mr. Altaf Ahmed, learned senior
counsel appearing for the Citibank (Opposite Party No.4) has submitted that it
is the function of the RBI to prescribe the maximum rate of interest by
exercising its powers under section 35-A of the Banking Regulation Act, 1949.
If there is failure on the part of the RBI to do so, banks cannot be held liable.
He has further submitted that if the RBI is satisfied that in public interest
or in the interest of banking policy or to prevent the affairs of the banking
companies being conducted in a manner detrimental to the interest of the
depositors it is necessary to do so, it can issue such directions. If that is
not done, the Citibank, Opposite Party No.4 cannot be held responsible for
charging allegedly excessive rate of interest. He has also submitted that the
rate of interest on defaulted or partial payments of credit card dues is
determined by taking into consideration various factors, including the risks of
default, and, therefore, this Commission may not determine the issue, as to
whether the interest at the rates of 36% to 49% p.a. is excessive. It is his
contention that as the RBI has prescribed no standards, the market forces would
generate the standards for the rates of interest and that is the stand of the
RBI. He has further submitted that the RBI is the monetary and banking policy
watchdog, and hence it has to check whether the interest charged by the banks
is excessive or not. If any standard is prescribed, then there would not be any
difficulty in enforcing the same because the RBI, as a delegate of Parliament,
can issue directions, which are like subordinate legislation.
Written Submissions
In addition to the oral submissions,
the RBI as well as some banks have furnished their exhaustive written
submissions, which are as under:
Written Submissions of the RBI
(1) Consumer Fora Have No
Jurisdiction Over the RBI
(a) Complainants
are not consumers, as the RBI is not rendering any service.
(b) The
functions exercised by the RBI in relation to credit cards is only regulatory
in nature.
(2) However, the Consumer Fora would
be entitled to adjudicate upon the question whether the rate of interest
charged by any specific bank amounts to unfair trade practice, as defined in
the Consumer Protection Act, 1986, and, issue consequential directions based on
such finding can be given.
(3)(a) The RBI has cautioned the
banks not to charge usurious rates of interest but in accordance with its
specific policy not to impose or recommend any ceiling on the rate of interest
that can be charged in respect of credit card transactions, the RBI has not
issued any directions fixing the maximum rate of interest.
(b) It is also not possible for the
RBI to determine whether a particular rate of interest would be ipso facto
excessive or usurious. That would depend upon the facts and circumstances of
each transaction, the nature and profile of the customer to whom the credit
card has been issued as well as other factors which cannot be monitored by the
RBI.
(c) Even under the Usurious Loans
Act, 1918 the phrase ‘excessive interest’ has been defined as follows:
”Excessive
means in excess of what which the Court deems to be reasonable having regard to
the risk incurred as it appeared, or must be taken to have appeared, to the
creditor on the date of the loan.”
(d) The RBI has been receiving
complaints regarding charging interest at excessive rates and has, in turn,
been advising the banks through its various circulars not to do so. All these
circulars have been placed on the record of this Commission. However, for the
non-priority sector personal loans such as those against credit cards, the
banks are free to determine the rate of interest, without reference to their
“benchmark prime lending rates” (BPLR).
(4) The actions taken by the RBI in
relation to the credit cards is only regulatory in nature and such actions
cannot be made subject matter of proceedings before this Commission, as this
Commission has no jurisdiction to declare the guidelines and instructions
issued by the RBI under its powers conferred by the Banking Regulation Act,
1949, as arbitrary, irrational or amounting to unfair trade practice.
(5) Further, a policy decision has
been taken by the RBI after liberalization of the economy not to regulate rates
of interest charged by the banks.
Written Submissions of the HSBC
(1) The complainants have no locus
standi to file this complaint. Complainants No.1 and 2 are not voluntary
consumer organizations registered under the provisions of the Companies Act,
1956.
(2) By virtue of section 21A of the
Banking Regulation Act, 1949, this complaint is not maintainable because the rates
of interest charged by the banking companies cannot be subjected to scrutiny by
the courts. [Re: State Bank of Hyderabad vs. Advath
Sakru & Anr., AIR 1994 AP 170; Syndicate Bank’s case; Central Bank of India
vs. Ravindra & Others (2002) 1 SCC 367].
(3) The Circulars issued by the RBI
have the sanctity of being statutory circulars for all banking and non-banking
companies. But the question whether a particular rate of interest is excessive
or not depends or is to be determined on the basis of evidence and materials
placed before the court in that particular dispute.
(4) The RBI, as the regulator and
supervisor of the financial system of the country, has the authority to deal
with interest rates fixed by credit card issuers. In the event a credit card issuer
fails to comply with the requirements of the RBI, the same may be brought to
the notice of the RBI for taking appropriate action.
(5) But the deregulation by the
regulator which holds the domain of the interest rate as a matter of economic
policy clearly recognizes that the setting of interest rates is governed by an
array of factors that have moving parts and an artificial ceiling on interest
rates cannot be justified as charging of interest rate depends upon various
factors.
(6) HBSC has further referred to
Circular DBOD.
(7) HSBC has also submitted ‘A
General Note on Pricing of Credit Cards’ to show how and to what extent
interest is charged by the banks on credit cards. This is summarised below.
“General
Note on Pricing of Credit Cards”
Credit
cards generally carry interest rate, which is quoted both on a monthly basis
and on an annualized basis (Annual Interest Rate – APR).
Who and what gets an Interest Rate
Billed?
The
interest due is calculated only on unpaid balances. A customer who pays in full is not charged any interest.
A credit card customer who undertakes transactions on his credit in a month and
pays the entire amount being the value of those transaction within the payment
due date in the succeeding month, pays no interest and no late payment charges,
and has between 18 and 52 days to make the payment.
Determining factors for the setting of an interest
rate
Banks
seek to obtain a reasonable and fair return for the credit provided by them to
credit card customers. The costs that a bank takes into account in providing
such credit card are, briefly, the following:
Bank’s
costs of funds
·
Each credit card
issuing bank’s costs of funds is different from that of another bank and is
dependent on a number of factors, including the capital and the number of
branches it has (and, therefore, correspondingly the number and size of the
deposits that it can garner for its business of lending).
·
A substantial
portion of credit card customers do avail of the interest-free credit period to
the maximum limit.
·
Cost to the bank
of non-performing loans (i.e., bad debts on account of non-payment of dues).
·
Credit card
issuing banks have credit card customers who default on their dues, and have to
factor in the cost of write offs and losses incurred on account of delinquency.
·
The bank’s
account acquisition costs and costs related to the maintenance, and the bank’s
costs of marketing promotions, offers and rewards.
·
In a competitive
market like
Interest
rates can be charged in two ways
·
Variable: These
are interest rates, which are assessed based on a “market” index. For such
interest rates, banks adopt an index rate, and then include a constant factor
to the index rate. E.g., in the United States of America, in general, the
credit card interest rate is set at “Prime” index (or “LIBOR”), e.g., Prime + 6.99%.
The index is market linked and disclosed in all major publications. The
interest rate then moves each time the index move.
·
Fixed: These
interest rates are typically constant
over time and the customer enjoys a “known” interest. Each time the rate
needs to change, the customer is informed.”
(8) Thereafter, HSBC has submitted
as to how the rate of interest is being charged on credit cards in various
countries, which we would reproduce in the subsequent paragraphs.
Written Submissions of the American Express Bank
(1) Under the Consumer Protection
Act, 1986, the Consumer Fora have no jurisdiction to determine the fixing of
rates of interest on credit cards by the banks contrary to the directives of
the RBI under the statutory provisions.
(2) The Consumer Protection Act,
1986 does not provide for interference by the National Commission in the
functioning of the regulator (RBI).
(3) In any case, appropriate remedy
for the consumers would be to approach the High Court under Art.226.
(4) As long as the banks are
functioning within the four corners of the statutory guidelines under the
Banking Regulation Act, 1949, there is no cause of action available to even
assert a plea of ‘unfair trade practice’ or ‘any deficiency in service’.
(5) The credit card operations are
in the nature of high risk unsecured lending and hence there is justification
of a higher rate of interest.
(6) It is incorrect to state that by
virtue of the Credit Bureau the credit card operations have now become safe. In
fact the credit history of customers is not easily identifiable or assessable
thus the risk from non-performing assets is higher. The market in
The
Written Submissions of the Citibank, N.
A. and the Standard Chartered Bank
are on the same lines as those of the HSBC.
Findings
I. Whether a complaint under the Consumer Protection Act, 1986, alleging
deficiency in service as contemplated under the Banking Regulation Act, 1949,
is maintainable against the RBI?
(1) At the outset it is made clear
that a complaint under the Consumer Protection Act, 1986 to curb unfair trade
practice(s) adopted by the banks is maintainable.
One of the objects and reasons of
the Consumer Protection Act, 1986 is, “the right to be informed about the
quality, quantity, potency, purity, standard and price of goods to protect the
consumer against unfair trade practice”.
Similarly, section 6(b) of this Act
provides that functions of the Central Council shall be, inter alia, to promote
and protect the rights of the consumers against unfair trade practice.
Thereafter, sec.14(1)(f), inter alia, empowers the Consumer Fora to direct
traders or service providers to discontinue an unfair or restrictive trade
practice or not to repeat them.
Further, unfair trade practice is defined very widely
under section 2(1)(r), which reads as under:
“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, …..”
We are not concerned with
the inclusive part of the definition.
Thereafter, section 2(1)(o) reads as under:
“2(1)(o)
"service" means service of any description which is made available
to potential users and includes, but not limited to, the provision of
facilities in connection with banking, financing, insurance, transport,
processing, supply of electrical or other energy, board or lodging or both,
housing construction, entertainment, amusement or the purveying of news or
other information, 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
Consumer Protection Act, 1986.
Hence,
if there is any unfair trade practice on the part of banks, the provisions of
the Consumer Protection Act, 1986 would be applicable and the banks can be
directed, as provided under sec.14(1)(f), to discontinue such unfair trade
practice and not to repeat them. Hence, to contend that a complaint under
Consumer Protection Act, 1986 against the banks is not maintainable, is of no
substance.
(2)
Further, section 2(1)(b) provides who can be a complainant. It reads as under:
“(2)(1)(b) "complainant" means—
(i) a
consumer; or
(ii) any
voluntary consumer association registered under the Companies Act, 1956 (1of
1956)or under any other law for the time being in force; or
(iii) the
Central Government or any State Government; or
(iv) one
or more consumers, where there are numerous consumers having the same
interest;
(v) in
case of death of a consumer, his legal heir or representative; who or which
makes a complaint;”
Similarly, the word ‘complaint’ as
defined under section 2(1)(c) reads as under:
“(c) "complaint" means any allegation
in writing made by a complainant that—
(i) an unfair
trade practice or a restrictive trade practice has been adopted by any
trader or service provider;
(ii) the goods
bought by him or agreed to be bought by him; suffer from one or more defects;
(iii) the
services hired or availed of or agreed to be hired or availed of by him suffer
from deficiency in any respect;
…………………………..
…………………………..
In this connection, the meaning of
the word ‘deficiency’ as defined in section 2(1)(g)
is also relevant:
“2(1)(g) "deficiency"
means any fault, imperfection, shortcoming or inadequacy
in the quality, nature and manner of performance which is required to
be maintained by or under any law for the time being in force or has been
undertaken to be performed by a person in pursuance of a contract or otherwise
in relation to any service;”
(3) All these provisions read
together would establish beyond doubt that the present complaint is
maintainable, if unfair trade practice is adopted by the banks. Further,
complainant no.1 is a registered public trust; complainant No.2 is a consumer
organization; and complainant No.3 is a consumer. Therefore, the complaint
filed by them for the alleged unfair trade practice of the banks is
maintainable under the Consumer Protection Act, 1986. Not only this, the word
‘deficiency’ as defined would mean any shortcoming or inadequacy in the manner
of performance which is required to be maintained by or under any law for the
time being in force. 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. But that question is not required to be dealt with finally in this
matter.
II. Whether
interest at rates ranging from 36% to 49% p.a. amounts to usurious rate of
interest?
(1) Article
in the Financial Express.
At this stage, we would quote a lead editorial
published on
“Rates on credit cards are very high. Why?
Prime lending rates haven’t gone up following RBI’s
squeeze through CRR, but sub-PLR rates are being hiked by banks and these
include rates on credit cards. Indian card users pay some of the highest
rates in the world. On average, card issuers charge around 36% interest
annually, topped by other charges. So, as banks raise credit card rates
further, the question always relevant becomes sharper: why do Indians pay close
to 40% annually when Americans pay around 13%? American banks settled
for this rate in the early years of this decade. No simple explanation suffices
to rationalize the difference. Cost of funds, lower in
What about
The comment in the aforesaid
editorial is that globally credit cards are regulated not by central banks per
se, but by consumer/fair trade regulators and laws. This institution is
unfortunately weak in
In our view, the aforesaid comments
are justified to some extent because the Central Consumer Protection Council
constituted under section 6 of the Act has not taken notice of the banks
charging excessive rate of interest from the credit card holders.
(2) Rate of interest charged from credit
card holders in other countries
We would now refer to some examples of the credit card interest rates in various countries and the
defence for charging interest at rates of 32% to 42%, as stated by the HSBC in
its written submissions. These are as under:
“Examples of
rate scenario
The
Mostly, credit card interest in the
The reasons that credit card issuers in the
(a) The
(b) With
established credit bureaus in these countries, banks are in a position to more
effectively deal with the credit card risks and the costs associated with
customers, and these risks and costs are therefore a relatively small
component, in these countries, of the total costs for credit cards incurred by
issuers as opposed to the situation that prevails for issuers in comparatively
less mature markets for credit cards.
(c) In mature
markets, credit card issuers are in a better position to assess, from a
customer’s prior behaviour patterns, his ability as well as willingness to pay
and hence accordingly incorporate the relatively lower cost element for
non-performance risk.
(d) Given a
developed securitization of assets market in the
(e) It may also be
noted that when customers default in mature markets, or miss payments, the
interest rate on defaulted payments can be as high as Prime + 24.99%.
Hong Kong SAR, which is also
considered a mature market.
The Hong Kong
SAR credit card market today operates on a “fixed” rate basis. Typical rates
currently vary from 24% to 32% to 36% to 40%.
The
Australian credit card market today operates on a “fixed” rate basis. Typical
rates currently vary from 18% to 24% ( Annualised Percentage Rate -APR).
The Philippines, Indonesia, Mexico,
all of which are emerging markets
The
credit card market today operates on a “fixed” rate basis. Typical rates
currently vary from 36% to 50% (APR).
In
In this background, the Respondent No.2 in
For
the first 12 months, customers are charged a fixed rate of interest. Subsequent
thereto, the customer interest rate can either increase or reduce depending on
the risk the Respondent No.2 has experienced, and how long the customer has
been a credit card customer of the Respondent No.2.
Accordingly,
a customer may initially (illustratively) pay a rate of 5% on balances if he
opts for the minimum amount due payment or roll-overs otherwise, and in the
event of defaults, the rate of interest may increase to 3.2% p.m. (38.4% p.a.)
over a period of time, and in the event of no defaults or subsequent
regularization of defaults, the rate of interest may reduce.
It
would therefore be erroneous to assume that at all times, and all the time, the
Respondent No.2 charges, or can afford to charge, it customers a set rate of
interest on credit card dues. 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. Thus a complaint customer stands on a far
better footing than does a defaulter and also has the option, in any event, of
availing of the interest free period by paying the entire amount due within the
stipulated time frame.
It
would be further erroneous to assume that the rate of interest levied by the
Respondent No.2 is “profit” in the hands of the Respondent No.2. at the expense of credit card customers. As
illustrated above, the rate of interest is dependent upon several factors,
including the cost of funds to the credit card issuer, and the risks to the
credit card issuer and the costs associated with the business of credit cards
and the stage at which a particular market is. The element of profit in the
interest rate at present, on average, ranges between 2% to 3%, which, it is
submitted, is by no stretch of imagination either usurious, excessive or
constitutes an unfair trade practice.
The
Respondent No.2 further submits that as a matter of fact, on an average, merely
30-35% of its credit card customers pay into on dues.
A
brief illustrative snap-shot of the key components of the interest rate in
relation to the credit card business, is provided below:
|
Interest
rate payable (for example) |
37% |
|
Less: cost of the card
issuer associated with the interest free period |
11% |
|
Less: Cost of funds for
the issuer |
9-10% |
|
Less: Credit costs,
including bad debt provisioning for the issuer |
7% |
|
Less: Issuer’s expenses |
7% |
|
Profit before tax |
2-3% |
An indicative synopsis of the elements of the
supporting infrastructure and associated costs that the Respondent No.2 as a
prudential banking company bears with regard to its credit cards business, is
as follows:
(a) Customer
call centers to address prospect and customer queries, receive, on an average 5
lakh calls per month in relation to credit cards.
(b) On
an average, the Respondent No.2 receives and deals with 40,000 e-mails and
60,000 letters per month in relation to credit cards.
(c) The
Respondent No.2 requires approximately 7500 in terms of head count with regard
to credit card customer acquisition, customer support and maintenance and
servicing, and requires the proportionate infrastructure in terms of office
space, amenities, infrastructure and equipment.
(3) Justification
by HSBC cannot be accepted
The foregoing detailed written
submissions of the HSBC seek to make out a case (on behalf of all private
sector banks involved here, as it were) that given the credit information
asymmetry in India and the resultant comparatively higher costs of ascertaining
the creditworthiness of individuals availing of the facility of credit cards as
well as other costs of operation, the rates of interest charged by such banks
on defaulted / partial payment of credit card dues are fully justified.
The
HSBC has also hinted at the application of lower rates of interest to compliant
credit card users. It is, however, of interest to note that there is not even a
whisper of any specific lower rates of interest charged from such compliant
credit card users. Secondly, there is no mechanism available in the public
domain of enforcing disclosure by any bank as to what its best-case scenario of the credit card
interest rates is. Had there been an indication of such rates as well as of the
broad outlines of any mechanism set up by a bank like the HSBC for determining
such “good behaviour” and had these details been available in the public
domain, some evaluation of the tortuously lengthy justifications given by the
HSBC for the excessive rates of interest charged by the banks in most cases may
have been feasible. In short, even from these detailed contentions, purporting
to be discerning, global and fair, in the face of comparative “immaturity” of
the Indian credit card market, there is no way of assuring ourselves (or, any
independent observer) as to whether the debtor/ borrower is, in the ultimate
analysis, left at the mercy of the bank / money lenders. The important
question, therefore, is: “whether the consumer - customer (credit card borrower
/ debtor) requires any protection?”
(4) Further,
till the credit card market becomes competitive and mature, banks cannot be permitted to exploit
the situation. If this contention is
accepted, then no law for protection against unfair trade practice is required.
It is to be stated in this context
that a “free market economy” is not an “unregulated” economy – in fact, the
“freer’ the economy, the stronger is the institutional “regulatory” framework
and prompter and more effective the enforcement of the independently
administered regulatory practices by the regulator(s). “De-regulation” in the
context of a so-called “emerging market economy” like
5. Whether Consumer debtors should be
left at the mercy of the bank
indulging in
money lending business.
From
the aforesaid contentions, the question to be considered by this Commission is
whether the debtor/borrower should be left at the mercy of the money
lender/Bank? Or, Whether he requires any protection?
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 licence 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
Secondly,
the Benchmark Prime Lending Rate (BPLR) declared by various banks even in after
de-regulation in
Thirdly,
is there any justification in treating moneylenders differently from the banks
or non-banking financial institutions, which are also doing the business of
money lending?
Prima
facie, there cannot be much distinction between money lending business carried
out by the banks or the non-banking financial institutions or the moneylenders.
Undisputedly, in this country, various money lending Acts are in existence and
moneylenders are prohibited from charging interest beyond a particular limit.
Further, the learned Counsel for the parties were not in a position to point
out that they are permitted by any money lending Act to charge interest beyond
20% p.a.
Fourthly, the Consumer Protection
Act, 1986, inter alia, provides that the Consumer Fora would have jurisdiction
to direct a service provider or trader not to indulge in unfair trade practice.
The phrase, ‘any unfair trade practice’ as used in section 2(1)(r) is very wide
to include such trade practices adopted by the banks.
(6) Unfair trade practice as considered
in the
(a) To some extent, ‘unfair trade
practice’ has been codified in the
“793. Unfair terms; in general: For the
purposes of the Unfair Terms in Consumer Contracts Regulations 1994, and
subject as follows, ‘unfair term’ means any term which contrary to the
requirement of good faith causes a significant imbalance in the parties’ rights
and obligations under the contract to the detriment of the consumer. An
assessment of the unfair nature of a term must be made taking into account the
nature of the goods or services for
which the contract was concluded and referring, as at the time
of the conclusion of the contract, to all circumstances attending
the conclusion of the contract and to
all the other terms of the contract or of another contract on which it is
dependent.
In
determining whether a term satisfies the requirement of good faith, regard must
be had in particular to the following matters:
(1) the strength
of the bargaining positions of the parties;
(2) whether
the consumer had an inducement to agree to the term;
(3) whether
the goods or services were sold or
supplied to the special order of the consumer; and
(4) the
extent to which the seller or supplier
has dealt fairly and equitably with the consumer.
The
1994 regulations contain an indicative list of unfair terms. In so far,
however, as it is in plain, intelligible language, no assessment is to be made
of the fairness of any term which defines the main subject matter of the
contract or concerns the adequacy of the price or remuneration, as against the
goods or services sold or supplied.”
Thereafter,
para. 794 of the said Volume deals with ‘Indicative and illustrative list of
terms which may be regarded as unfair’ are given. One of the unfair terms, as
given in sub-para. (5), is: ‘requiring any consumer who fails to fulfill his
obligation to pay a disproportionately high sum in compensation’.
(b) It is to be stated that even in
the free market, mature economy of the U.K., the Director General of Fair
Trading considers every year what would be considered to be unfair trade
practice and prepares a list for disseminating in such form and such manner, as
he considers appropriate. Unfortunately, in our country, the regulator who is
empowered under section 35-A of the Banking Regulation Act has left it to the
absolute discretion of the banks.
7. Role
of the RBI
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 aforesaid provision has been interpreted
by the
“50. Though we have answered
the question of law before us, but we cannot leave the matter at that alone
without sounding notes of caution, lest
our view of the law should be
misconstrued and misapplied. Before we do so, it would be
appropriate to refer to the decision of this Court in Corporation Bank
v. D.S. Gowda in some detail.
51. The Banking Regulation
Act, 1949 empowers the Reserve Bank, on it being satisfied that it is necessary
or expedient in the public interest or in the interest of depositors or banking
policy so to do, to determine the policy in relation to advances to be followed
by banking companies generally or by any banking company in particular and when
the policy has been so determined it has a binding effect. In particular, the Reserve
Bank of
And,
thereafter, in para. 55, it is held as under:
55. During the course of
hearing it was brought to our notice that in view of several usury laws and
debt relief laws in force in several States private money-lending has
almost come to an end and needy borrowers by and large depend on banking
institutions for financial facilities. Several unhealthy practices
having slowly penetrated into prevalence were pointed out. Banking is an
organised institution and 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. Borrowers
other than those belonging to the corporate sector, find themselves having
unwittingly fallen into a trap and rendered themselves liable and obliged to
pay interest the quantum whereof may at the end prove to be ruinous. At
times the interest charged and capitalised is manifold than the amount actually
advanced. Rule of damdupat does not apply. Penal interest, service charges
and other overheads are debited in the account of the borrower and
capitalised of which debits the borrower may not even be aware. If the practice
of charging interest on quarterly rests is upheld and given a judicial
recognition, unscrupulous banks may resort to charging interest even on monthly
rests and capitalising the same. Statements of accounts supplied by banks
to borrowers many a time do not contain particulars or details of debit entries
and when written in hand are worse than medical prescriptions putting to test
the eyes and wits of the borrowers. Instances of unscrupulous, unfair and
unhealthy dealings can be multiplied though they cannot be generalised.
Suffice it to observe that such issues shall have to be left open to be
adjudicated upon in appropriate cases as and when actually arising for
decision and we cannot venture into laying down law on such issues as do
not arise for determination before us.
In
the following sub-paragraphs of para. 55, the Court has further observed:
(5)
The power conferred by sections 21 and 35-A of the Banking Regulation Act, 1949
is coupled with duty to act. The Reserve Bank of
(7)
Any interest charged and/or capitalised in violation of RBI directives, as to
rate of interest, or as to periods at which rests can be arrived at, shall be
disallowed and/or excluded from capital sum and be treated only as interest and
dealt with accordingly.
(8) Award of interest pendente lite and
post-decree is discretionary with the court as it is essentially governed by
section 34 CPC dehors the contract between the parties. In a given case if the
court finds that in the principal sum adjudged on the date of the suit the
component of interest is disproportionate with the component of the
principal sum actually advanced the court may exercise its discretion in
awarding interest pendente lite and post-decree interest at a lower rate
or may even decline awarding such interest. The discretion shall be
exercised fairly, judiciously and for reasons and not in an arbitrary or
fanciful manner.”
(8) From the aforesaid judgment it is
apparent that:
(a) the
(b) 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
(c)
The power conferred by sections 21 and 35-A of the Banking Regulation Act, 1949
is coupled with the duty to act. The
(d) 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.
(e)
The Court has specifically stated that unscrupulous banks may resort to
charging of interest even on monthly rests. It is, therefore, required to be
clarified that such unscrupulous banks should not be permitted to charge
interest on credit cards on monthly rests.
(f)
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.
(g)
Further, despite our repeated suggestion, the learned Counsel for the RBI
failed to find out what could be considered as usurious rate of interest on the
basis of which the RBI had issued circulars to banks. There was no response
except to say that with regard to rate of interest RBI has deregulated the
same.
In
our view, 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.
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.
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 aforesaid stand of the RBI is
required to be considered in the context
of observation made in Lucknow Development Authority Vs. M. K. Gupta,
[(1994) 1 SCC 243], one of the leading judgments on Consumer Protection Act,
1986. The
Imagine, how aptly the above quoted
observations of the
III. (1)
Considering the aforesaid aspects we have to find out whether charging of
interest between 36% p.a. to 50% p.a. from the credit card holders is usurious
/ excessive rate of interest.
For
determining whether charging of interest rates from 36% to 49% is unfair trade
practice, we have to also take into consideration the bargaining position of
the parties, namely, banks and credit card holders. 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.
And, thirdly, 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.
(2) As stated by the HSBC in its
written submission, in the
(3) In our view, there is no
justifiable ground for adopting the highest rate of interest prevailing in
smaller economies. Further, there is no justifiable ground in not even
attempting to follow what is prevailing in developed countries, namely, the rate of interest at 9.99% to 17.99 (
(4) For this purpose, we would refer to bank-wise lending
rates for the advances for the quarter ending 2008, published on the website of
the RBI:
(i) For the public sector banks, the BPLR
varies from 12.52% to 13.25%, i.e., the maximum is 13.25%.
(ii) On demand loans, the maximum rate of
interest varies from 13.75% to 17%; and the minimum rate varies from 6.25% to
13%.
(iii) For various other banks, the Prime
Lending Rate (PLR) varies from 10% pa to 15.50% p.a.
(iv) The maximum rate
of interest charged on demand loans is 18% p.a. and minimum rate of interest
ranges from 5.63% to 14.50% p.a. On term loan also it is between 7.50%. to
14.50% p.a. From the aforesaid statement
it is apparent that average rate of
interest on any kind of loan is upto 15%. Even if we add additional 15% p.a. as
additional costs for recovering the amount from the credit card holders, then
also the rate of interest cannot exceed 30%.
(5) Further, apart from charging of
interest, the banks are undisputedly also charging commission from the traders
or the service providers, if the items are purchased or the services are
availed of from such traders or service providers, using credit cards. This
aspect is not discussed by the HSBC in its written submissions. Further, it is
to be stated that the burden of commission, which the bank gets would usually
be passed on to the purchasers as it would generally be included in the price
of the goods/services so transacted through credit cards. That is to say, the
payment of commission to the bank by a trader or service provider would be at
the cost of the consumer/credit card holder.
(6) 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. The said section reads as under:
“21-A. Rates of interest charged by banking companies not
to be subject to scrutiny by courts.— Notwithstanding anything contained in
the Usurious Loans Act, 1918 (10 of 1918), or any other law relating to
indebtedness in force in any State, a transaction between banking company and
its debtor shall not be reopened by any court on the ground that the rate of
interest charged by the banking company in respect of such transaction is
excessive.”
(7) In the present case, we are not
reopening any transaction, which has taken place between the bank and the
credit card holders. But under the provisions of the Consumer Protection Act,
1986, 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) 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:
“14. Finding of the District Forum.— (1) If, after the
proceeding conducted under section 13, the District Forum is satisfied that the
goods complained against suffer from any of the defects specified in the
complaint or that any of the allegations contained in the complaint about the
services are proved, it shall issue an order to the opposite party directing
him to do one or more of the following things, namely:--
(a) to (e) ……..………………….
(f) to discontinue the unfair
trade practice or the restrictive trade practice or not to repeat them;
(g) to (i) ……………………..……”
(8) We are making 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.
(9) 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.
Conclusion
For the foregoing reasons, it is
directed as under:
(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 capitalised.
(iii) Charging of interest with monthly rests
is also an unfair trade practice.
(iv) Hence, the banks are directed not to
indulge in the aforesaid unfair trade practices or repeat them.
The
complaint is allowed and the revision petition is disposed of accordingly.
There shall be no order as to costs.
We would like to
place on record our appreciation of the valuable assistance given to this
Commission by Ms. Indu Malhotra, Senior Advocate, with Mr. Abhinav Agnihotri,
Advocate as amicus curiae and also Mr. J. K. Mittal, Advocate, also an amicus curiae.
Sd/-
………………………………………J.
[M. B. SHAH)
PRESIDENT
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…………………………………………
[RAJYALAKSMI RAO]
MEMBER
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……………………..…………………
[ANUPAM DASGUPTA]
MEMBER