Don't throw caution to the winds; Play with its direction ….

Credit Card holders have always been at the receiving end. The outstanding dues on a Credit card multiply at a phenomenal rate, so much so that in a short-time the interest along with the delayed payment charges and penalties far exceed the outstanding amount. This is the most lucrative business for banks. Similarly, non-banking financial companies and money lenders also flee customers when loans are advanced. Is the charging of such excessive interest and penal charges permissible. Can the common man fight against it? this interesting issue has been recently decided the National Consumer Disputes Redressal Commission in a landmark judgement given on 7th July,2008 by the Bench comprising of Justice M.B.Shah, Mrs. Rayjalakshmi rao and Mr.Anupam Dasgupta in respect of two cases - (a) A complaint filed by consumer organisations "Awaz" and "Jagrut Nagrik" from Ahmedabad along with the aggrieved consumer against Reserve Bank of India, HSBC Bank, American Express Bank, Citibank and Standard Chartered Bank and (b) A Revision Petition filed by DCM Financial Services Ltd, against Mukesh Rajput and Chhabiram Singh Dhakad Proprietor, Vikram Financial Services.

Case Study: The Commission took judicial note that the rapid expansion of banking facilities and access to credit facilities coupled with aggressive marketing practices, induce 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 "EMI s" - at times well beyond the borrowers/debtors' repaying capacity. The ill effects of unaoofrdable EMIs are now being highlighted in the print and other media almost daily. In the case of motor vechile loans, for example, the debtor /borrowers is under constant tension that if he fails to pay one or two instalments, he would receive threast from the so-called "recovery agents" of the banks. The Reserve Bank has permitted banks to appoint "recovery agents" on contract without perhaps fully appreciating the implications that such agents are usually musclemen, employing whom increases nothing but gondaism. The Commission addressed itself to theissue as to whether interest at rates ranging from 36% to 49% p.a. can be charged in case of delay or default in payment within the time specified and whether this would amount to charging usurious rates of interest. The Reserve Bank of India (RBI) challenged the maintainability of the complaint under the Consumer Protection Act (CPA), claiming that a consumer forum cannot excercise jurisdiction over it. Also, since RBI is not rendering any service, the complainants could not be termed consumer entitled to file a complaint uner the CPA. It also claimed that no proceddings before a consumer fora were maintainable against the RBI as it is a regulatory authority and its actions cannot be made the subject matter of proceedings before consumer fora. It also challenged the consumer fora's jurisdiction issued by it under its powers conferred by the Banking Regulation Act 1949 (BRA) as arbitray, irrational or amounting to unfair trade practice.

It, however, claimed that the cosumer fora would be entitled to adjudicate whether or not the rate of interest charged by any specific bank amounts to an unfair trade practive. It pointed out that even under the Usurious Loans Act 1918 the phrase "excessive interest" means inexcess of what a Court deems to be reasonable having regard to the risk incurred at the time of sactioning the loan. On merits, RBI stated that it had earlier directed the banks not to charge excessive rates of interest, but clarified that after liberalistion of the economy, its present policy is not to directly regulate the rates of interest charged by the banks, leaving it the bank's directors to fix the same. RBI contended that since it has the discretionary power conferred under the Banking Regulation Act 1949, it cannot be directed to issue any further instruction. Citibank claim that RBI is the monetary and banking policy watchdog. So it was upto the RBI to check whether the interest charged is excessive or not. In fact, under section 35-A of the Banking Regulation Act, it was the function of the RBI to prescribe the maximum rate of interest. Even otherwise, if RBI had the authority to issue direction in public interest or to prevent banking companies from conducting their affairs in a manner detrimental to the interests of the consumers. However, the RBI has failed to prescribe such maximum rate. So banks cannot be held liable. Further, banks fix the interest rates taking into consideration various factors, including the risks of default. so the National Commission should not determine the issue of fixation of the interest rate. The other banks also objected to the maintainability and devence was almost similar. HSBC additionally argued that the complaint is not maintainable because section 21A of the BRA states that the rates of interest charged by banking companies cannot be subjected to scrutiny by the courts. Over-ruling these objections, the National Commission observed that one of the objective of the CPA is the right to be informed about the quality, quantity, potency, purity, standard and price of goods to protect the consumer against unfair trade practive. While the Commission cannot re-open any transaction in view of section 21A, a complaint for curbing an unfair trade practive would be maintainable. The Commission held that it could proceed against the RBI because the BRA required the RBI to discharge certain functions in public interest and the failure of the RBI to do so would constitute an unfair trade practive. Posing the question whether a consumer (credit card borrower/ debtor ) requires any protection, it concluded that till the credit card market becomes competitive and mature, banks cannot be permitted to exploit the situation. It further observed that a free economy would not mean permission is granted to exploit the borrowers/debtors by taking advange of their basic needs for their livelihood. Such exploitation would be an unfair trade practice. It cannot be permitted in any civilised society, even it is a ade-regulated free market economy. It noted that in America, which is also a de-regulated free market economy, the maximum rate of interest charged on credit cards is 13% p.a So, there could not be any justfication to exploit the situation in India. The Commission considered the Benchmark Prime Lending Rate (BPLR) declared by various banks, which varies from 10% p.a to 15.50% p.a. even after de-regulation in India, and held that a comparison would establish that charging interest at the rate of 36% to 49% cannot be justified. The Commission then addressed itself to the issue whether banks or non-banking financial institutions could be treated differently from money-lenders although all were the same business of money lending? there are various Acts which prohibit money-lenders from charging interest beyond 20% p.a. The Commission relied on the note of caution given by the Supreme Court in the case Central Bank of India v/s Ravindra & Ors. where the Apex Court had observed that banking is an organised institution and most banks have long-running documents wherein the borrowers fill in the blanks, at times without caring to read what has been stated therein, and bind themselves by the stipulations drafted by the best of legal brains. Borrowers thus often find themselves having unwittingly fallen into a trap and rendered themselves liable and obliged to pay interest, the quantum of which may prove to be ruinous. At times the interest charged and capitalized is mainfold than the amount actually advanced. Penal interest, service charges and other overheads are debited in the account of the borrower and capitalized, and often without the borrower being aware of the same. If the practive 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 capitalizing the same. Statements of accounts supplied by banks to borrowers many a time do not contain particulars or details of debit entries. Instances of unscrupulous, unfair and unhealthy dealing can be multiplied though they cannot be generalized. Suffice it to observe that such issues have to be left open to be adjudicated upon in appropriate cases as and when actually arising for decision and not general law can be laid down. Accordingly, the Commission held that charging of interest at 36% to 49% p.a. is exorbitant and amounts to exploitation of the borrowers/debtors and is usurious, and held that :

Charging of interest at rates in excess of 30% p.a. from the credit card holders for failure to make payment on the due date, is an unfair trade practice.

Penal interest can be charged only once for one period of default and shall not be capitalised.

Charging of interest with monthly rests is also an unfair trade practive.

Banks must not to indulge in the aforesaid unfair trade practices or repeat them in future..

Impact This landmark judgement will come to the aid of millions of borrowers and credit card holders and will prevent banks from exploiting them in future