NATIONAL CONSUMER DISPUTES REDRESSAL COMMISSION
Punita Society, Ambawadi,
Ahmedabad – 381 006
16, Satyadeep Apartments,
East of Kailash,
2. “Jagrut Nagrik”,
Regd. Office: Gendi Gate, Complainants
3. Pradeep Kumar Thakur
13, Satyadeep Apartments,
East of Kailash,
1. Reserve Bank of
Shaheed Bhagat Singh Marg,
Mumbai – 400 001
Banking Corporation Ltd. (HSBC),
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,
9/10, Bahadur Shah Zafar Marg,
DCM Financial Services Ltd.,
75, Amrit Nagar, NDSE Part I, Petitioner
New Delhi-110 003
1. Mukesh Rajput,
Ganeshpura, District – Morena,
At Present – Vijay Nagar,
2. Chhabiram Singh Dhakad,
Prop. Vikram Financial Services,
Ashish Bhawan, Jayendraganj Laskar,
D-4, Vikram Villa, Chetakpuri,
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
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,
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,
No.1: Mr. Prem Kumar Chugh, Advocate
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.
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.
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
(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
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.
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
“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
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
Mostly, credit card interest in the
The reasons that credit card issuers in 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 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)
Less: cost of the card issuer associated with the interest free period
Less: Cost of funds for the issuer
Less: Credit costs, including bad debt provisioning for the issuer
Less: Issuer’s expenses
Profit before tax
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?
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
the Benchmark Prime Lending Rate (BPLR) declared by various banks even in after
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
(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
“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
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:
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:
(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
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,
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.
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.
[M. B. SHAH)