Defaulted on card payments? Get ready to pay higher penalties
What's the story
The Supreme Court of India has overturned an earlier order of the National Consumer Dispute Redressal Commission (NCDRC), which capped the interest rate for credit card default payments at 30%.
The order was passed by a bench of Justice Bela Trivedi and Justice Satish Chandra Sharma.
The ruling gives banks more freedom to set their own interest rates for credit card defaults, unbound by the cap.
New guidelines
Penal interest rates can be set as per cost structures
The SC's ruling puts an end to a long-standing issue that had been a bone of contention in the banking industry.
Major financial institutions including HSBC had earlier approached SC seeking a stay on NCDRC's ruling. They argued it would severely restrict their ability to charge higher interest on credit card defaults.
The latest ruling allows banks to set penal interest rates as per their cost structures, with these rates reflecting all costs incurred in managing credit card defaults.
Impact assessment
Penalty rates could go as high as 49%
As a result of the SC's decision, banks are now free to levy higher penalty rates on overdue credit card payments. The rates could potentially go as high as 49%.
The case was first brought about by a petition from Awaz Foundation, an NGO that questioned if charging interest rates between 36-49% per annum on credit card dues was exploitative/usurious.
Regulatory critique
NCDRC's previous stance on high interest rates
Previously, the NCDRC had slammed such exorbitant rates as excessive and said they unfairly burdened customers, particularly those already in financial distress.
The commission also slammed the Reserve Bank of India (RBI) for its inaction. It alleged that the central bank's failure to define a "usurious" interest rate had enabled financial institutions to exploit borrowers.
Profitability concerns
Capping interest rates would hurt profitability
Defending their stand, banks argued that capping interest rates would hurt their profitability and impact credit availability.
They argued that high interest rates offset the risk of default and the cost of offering services like customer assistance and free alerts.
Further, they argued that the NCDRC had no jurisdiction to regulate their operations, especially when it comes to matters of interest rates, which fall under RBI's purview.