CREDIT
CARD & HIGH RATE OF INTEREST: NOT A CONSUMER DISPUTE
The
Supreme Court has recently on 20th December 2024 has categorically ascertained
the details in respect of payment of interest by the credit card holder to the
concerned bank/company in a matter captioned as HONGKONG AND SHANGHAI BANKING
CORP. LTD. Versus AWAZ & ORS. CIVIL APPEAL NO. 5273 OF 2008. Whether the
alleged excessive rate of interest shall fall within the domain of Consumer
Protection Act 1986 or the amended Act? The bunch of appeals has arisen out of the common Judgment & Order
dated 07.07.2008 passed by the National Consumer Disputes Redressal Commission,
Delhi (NCDRC) in Complaint Case No. 51/2007 and Revision Petition No.
1913/2004.
The National Commission proceeded with
the prima-facie view that the charging of interest at
rates ranging from 36% to 49% p.a. is exorbitant and amounts to the
exploitation of the borrowers/debtors and is usurious, had framed the following
issues:
i.
Whether the Reserve Bank of India (RBI) is required to issue any circular or guidelines
prohibiting the Banks/Non-Banking Financial Institutions/money lenders from
charging interest above a specific rate?
ii.
(a) Whether banks can charge the credit card users interest at rates 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?
The appellant (HSBCL) have challenged
the correctness of the Impugned Order dated 07.07.2008, whereby the National
Commission has held that the charging of interest at rates beyond 30% by the
banks/non-banking financial institutions, from credit card holders, upon delay
or default in payment, constitutes an unfair trade practice and that penal
interest could be charged only once for one period of default and the same
shall not be capitalized. The conclusive observation under challenge, passed by
the National Commission is as under:
(i)
Charging of interest rates in excess of 30% p.a. from the credit card holders
by banks for the former’s failure to make full payment on the due date or
paying the minimum amount due, is an unfair trade practice.
(ii)
Penal interest can be charged only once for one period of default and shall not
be capitalized.
(iii)
Charging of interest with monthly rests is also an unfair trade practice.
The Appellants before the Supreme Court
have assailed the aforesaid finding of NCDRC and have contended that
determining the reasonability and ‘fixing of the maximum or the minimum rates
of interest’, is the exclusive function of the RBI, a statutory authority
responsible for the regulation of the Indian Banking system. It was submitted
by the appellant that the observations of the NCDRC is in the teeth of the
statutory bar under section 21 A & 35 A of the Banking Regulation Act, as
it expressly bars courts/tribunals to re-open transactions between banks, on
the question that the rates of interest are excessive and empowers the RBI to
formulate directions, as befitting the public interest, proper management and
banking policies of the country.
It was thus further contended that the
order passed by the NCDRC have encroached the statutory domain of the RBI and
that is against the mandate of the Constitution and contrary to the legislative
intent of the Reserve Bank of India Act, 1934. It was also submitted that in
the guise of public interest litigation (PIL) a consumer complaint was
preferred and the same is not in consonance with the prescription of Complaint
u/s 12 r/w 13 of the Consumer Protection Act, 1986 and as such the consumer
complaint was wrongly entertained by NCDRC and the same is beyond its inherent
jurisdiction.
The original complainants before the
NCDRC, arrayed before the Supreme Court as Respondents nos. 1 to 3 before the NCDRC, have also preferred a
cross-Appeal bearing CA. 6679/2008, against the Impugned Judgment dt.
07.07.2008 contending that the NCDRC has only partly allowed their complaint,
and ought to have also adjudicated upon a benchmark restriction for the rates
of interest charged by banks from credit card holders. It is contended that the
rates of interest charged by the banks from its credit cardholders is usurious
and exploitative in nature, and in contravention of the circulars issued by the
Reserve Bank of India. The Complainants claim that they represent the public at
large, as a voluntary consumer association voicing against the usurious rate of
interest charged by the banks, which is a deficiency in service in banking and
constitutes an unfair trade practice, in terms of the Consumer Protection Act,
1986.
It is argued on behalf of the
Complainants that there ought to have been a Notification passed by the Reserve
Bank of India, fixing a maximum ceiling rate of interest for all banks, and in
pursuance thereto had approached the National Commission by filing the Consumer
Complaint no. 51 of 2007. It was thus prayed that the Appellant be permanently
restrained from charging excessive interest and service charges, de-hors the Prime Lending Rate, and the
directions issued by the Reserve Bank of India. It was further prayed that all
banks who have issued credit cards to the Respondent no. 3 and members of the
Respondent no.1 be directed to refund the amount of interest, claiming the same
to be more than Rs. 5 Crores.
Submissions of
appellants/BANKS
(i)
It
was submitted that the Appellant, and Respondent nos. 5, 6 and 7 are foreign
banks carrying on the business of banking in India under the provisions of the
Banking Regulation Act, 1949 and are scheduled commercial Banks as notified by
the Reserve Bank of India. The allegations raised by the Complainant that the
rate of interest, charged by banks from its credit card holders, constitutes an
unfair trade practice, is erroneous. It was submitted that there is no whisper
to suggest that adopting of any unfair methods, or deceptive means to promote
the sale, use or supply of any goods or for providing any service. As banks
have neither indulged in any unfair trade practice nor have done anything wrong
so as to bring them within the trap of Section 2(r)(l)(i) to 2(r)(l)(x).
(ii)
The
NCDRC has barely acted on the assumption that banks are indulging in unfair
trade practices without any corresponding facts to that effect. The NCDRC has
observed that rates of interest charged by banks is an unfair trade practice,
while ignoring as to what are the scope of the definition under section 2(1)(r)
of the Act. The assumption that alleged charging of excessive interest being unfair trade
practice in as much as the Banking Regulation Act, 1949 requires that the RBI
shall discharge certain functions in the public interest and if the RBI does
not discharge such functions, it would amount to unfair trade practice, is
erroneous.
(iii)
The
appellant had submitted that administrative policy decisions as regards the
determination of interest on credit cards and the regulation of the banks are
within the specific statutory domain of the RBI. The List I of Seventh Schedule
of the Constitution of India had conferred upon the RBI, the powers of
subordinate legislation to formulate directives, circulars, and administrative
policies, having statutory force and being binding on all Banks from time to
time1 Moreover, the Preamble of the Reserve Bank of
India Act, 1934 enlists the endeavour of the RBI to " secure monetary
stability in India, having a modern monetary policy framework to meet the
challenge of an increasingly complex economy, while maintaining price stability
is the endeavour of the Reserve Bank of India.
(iv)
The
observations by the NCDRC that the rate of interest, in excess of 30% per annum
is an unfair trade practice, is per se illegal and transgression to the domain
of RBI and runs contrary to the legislative intent of the Banking Regulation
Act, 1949.
(v)
The
NCDRC can’t supplant itself as the regulator of the banking systems in the
place of RBI, since, there is a clear bar under section 21A of the Banking
Regulation Act, 1949. The section 21A and 35A of the Banking Regulation Act,
1949 are enabling provisions for the RBI and mandate it to give directions/guidelines
to banks/banking companies, in the public interest. Section 21A in specific,
creates an embargo upon courts/tribunals to re-open and adjudicate upon transactions
on the ground that the rate of interest is excessive.
(vi)
The
rates of interest on credit card dues are neither usurious nor do they
constitute a practice that is unfair, arbitrary or unreasonable. The practice
of charging any interest on credit cards dues is such that credit card
generally carry an interest rate on an annualised basis (Annual Interest
Rate-APR). The interest due is calculated only on unpaid balances. If any
customer pays the entire amount due within the due date of payment, they are not
charged any interest. The penalty or cost of such interest is incurred only, if
there is default and that is necessary with a view to costs incurred by the
bank of non-performing loans or bad debt and to meet acquisition costs etc and
hence it is not unreasonable.
(vii)
The
interest is charged by the bank in accordance with the circulars issued by the
RBI and cannot be construed as unfair trade practice, as the interest is paid,
only, by those who default in making payments of their credit-card bills, after
having reaped the benefits of free credit for specified periods ranging between
17-55 days. Those, who do not make payment of the entirety of their dues on
each bill, and then on the balance dues has to be saddled with the terms of
payment. When the terms and conditions for charging of rates of interest or
charges applicable thereto are duly informed to all customers by the bank and
further when the customers are duly conveyed the standard set of conditions for
the issuance and usage of credit cards and responsibilities of the card holders
are duly defined and
when all relevant information as regards fee, charges applicable on credit
cards, finance charges and withdrawal limits are provided at the time of the
generation of each monthly bank/billing statement, thus, no unfair trade practices
could be alleged, more so, from the day one the customer is made aware, that,
in the event of delay in making payment,
liability of interest payment shall arise.
COMPLAINANT’S
VERSIONS
(i)
The
terms and conditions laid down by the Banks, at the time of issuance of the
credit cards, constitute a unilateral, and one-sided contract. The
characteristics associated with a contract, such as freedom of contract and
consensus are absent from such contracts, which makes such terms unfair and unconscionable.
The term “unfair contracts” has been defined under section 2(46) of the
Consumer Protection Act, 1986 and include all such contracts that have terms
which cause significant change in the rights of such consumer. It is submitted
that the unilateral terms of the banks, in charging such excessive rates of interest,
is such an unfair contract.
(ii)
The
banks have been charging rates of interest on credit cards in excess of their
Benchmark Prime Lending rate (BPLR) on credit limits of less than Rs. 2 Lakhs,
in contravention to the annual policy 2003- 2004.
(iii)
A
person aggrieved by the excessive rates of interest cannot be rendered helpless
and by virtue of section 2 of the Banking Regulation Act, 1949, the operation
of other laws is not expressly barred. It is the grievance of the Complainants
that since the person who opens a bank account with a Bank, is a consumer of
the bank’s facilities, the provisions of Consumer Protection Act, 1986 and the
Consumer Forums are the necessary medium for grievance redressal.
CONTENTIONS OF RBI
On behalf of the RBI, it is submitted
that in terms of the regulatory guidelines issued vide Master Direction-Credit
Card & Debit Card-Issuance and Conduct dated April 21, 2022 as on March 07,
interest charged on credit cards shall be justifiable having regard to the cost
incurred and the extent of return that could be reasonably expected by the card
user. Moreover, it is also canvassed on behalf of RBI after placing reliance on
L.Chandra
Kumar vs Union of India & Ors. [1997] 3 SCC 261 that whereas the Supreme Court under Article 32 and the High
Courts’ under Article 226 of the Constitution of India have the power of judicial review of statutory
instruments. It is not within the executive domain of the National Commission
to judicially review the circulars/directives and hold that the policy
contained therein is invalid. The National Commission is bound to accept the
policy contained in the circulars as valid and cannot question the policy
decision of the Reserve Bank not to impose a ceiling on the rate of interest to
be charged by the Banks on the credit card transactions.
FURTHER ANALYSIS
(1) The Supreme Court in a matter captioned
as Keshav Lal Khemchang & Sons Pvt. Ltd & Ors. Vs Union of India [2015]
4 SCC 770 has held that the Parliament of India, under List I of the Seventh
Schedule of the Constitution of India had conferred upon the Reserve Bank of
India, the powers of subordinate legislation to formulate directives,
circulars, and administrative policies, having statutory force and being
binding on all Banks from time to time.
(2) The
Supreme Court in the Central
Bank of India Vs Ravindran [2002] 1 SCC 367 has observed that “With effect from 15.2.1984,
Section 21A has been inserted in the Act, which takes away power of the court
to reopen a transaction between a banking company and its debtor on the ground
that the rate of interest charged is excessive. The provision has been given an
overriding effect over the Usurious Loans Act, 1918 and any other provincial
law in force relating to indebtedness. According to Supreme Court all transactions, that may not
be squarely governed by such circulars, the RBI directives may be treated as
standards for the purpose of deciding whether the interest charged is
excessive, usurious or opposed to public policy.
(3) The Supreme Court in Pratibha
Pratisthan Vs Canara Bank (2017) 3 SCC 712 has held that a trust,
whether registered under the Indian Trust Act, or the State Trust Registration
Act, is not a person ‘person’ as defined under Section 2(1)(m) of the Consumer Protection Act, 1986,
and & therefore not a consumer and consequently cannot invoke provisions or
file a consumer dispute under the provisions of this Act
FINDING OF SUPREME COURT
The Supreme Court has held in Hongkong
& Saanghai Banking Corporation (Supra) In Para no.59, 65, and 66 are as
under:
“59. In addition, we are also of the
considered view, that an endeavour to cap the rate of interest charged by banks
and dictating the need for a Benchmark Prime Lending Rate, drawing parallels
with other economies across the world, whilst failing to trust the prudence of
the Reserve Bank of India which has been entrusted with the fundamental
responsibility of regulation of the monetary system and banking business is
unwarranted.
“65. Therefore, when a person signs a
document which contains certain contractual terms, that normally parties are
bound by such contract; it is for the parties to establish an exception in a
suit. When a party to the contract disputes the binding nature of the signed
document, it is for him to prove the terms, in the contract, or circumstances
in which he came to sign the documents, need to be established20. Hence, the National Commission had no jurisdiction to
re-write the said terms of the contract entered between the banks and the
credit cardholders, which the parties have mutually agreed to be bound by”.
“66. Even
otherwise, it is not the case of the Complainants or as adjudicated by the
National Commission, that the decision by the Reserve Bank of India, being a
statutory authority whilst imposing interest acts contrary to public good,
public interest, unfairly, unjustly and unreasonably, in its contractual,
constitutional or statutory obligations”.
The Supreme Court in Homgkong & Saanghai Banking Corporation (Supra)
has also referred to in para 67 as under:
67. In addition, thereto, in the case
of Colgate
Palmolive (India) Ltd. Vs MRTP Commission [2003] 1 SCC 129, had laid down five ingredients before
a trade practice could be an “unfair trade practice”, as under:
(1)
There must be a trade practice [within the meaning of Section 2(u) of the
Monopolies and Restrictive Trade Practices Act].
(2)
The trade practice must be employed for the purpose of promoting the sale, use
or supply of any goods or the provision of any services.
(3)
The trade practice should fall within the ambit of one or more of the
categories enumerated in clauses (1) to (5) of Section 36A
(4)
The trade practice should cause loss or injury to the consumers of goods or
services.
(5)
The trade practice under clause (1) should involve making a statement whether
orally or in writing or by visible interpretation.
In
para 69 therefore it is concluded as under:
“69. In the present context, the pre-conditions
of ‘deceptive practice’ and unfair method’ are manifestly absent. The Banks
have in no manner made any misrepresentation, to deceive the credit card
holders. Upon availing the facility of the credit cards, the customers, are
made aware of ‘the most important terms and
conditions’,
including the rate of interest, that shall be charged by the Banks. Even on
merits, the Reserve Bank of India, has made it clear that there exists no
material on record, to establish that any bank has acted contrary to the policy
directives issued by the RBI. Even otherwise, there is not even a single
averment so as to establish how the charging of rates of interest upon the
default by credit card holders, without a standardized rate, is usurious and
constitutes an unfair trade practice. The mere inflation in the rates of
interest cannot be construed as a practice, intended to cause loss or injury”.
Therefore, the Supreme Court has held
that the question of directing the RBI to act against any bank does not arise,
in the facts and circumstances of the present case. Thus, it was also held that
there is no question or need of any direction to the RBI to impose any cap on
the rate of interest, either on the banking sector as a whole, or in respect of
any one particular bank, contrary to the provisions contained in the Banking
Regulation Act, and the circulars/directions issued thereunder. The order
passed by the NCDRC in Awaz & Ors. Vs Reserve Bank
of India
was therefore set aside and appeal
filed by the bank stands allowed.
------
Anil
K Khaware
Founder & Senior Associate
Societylawandjustice.com
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