MUMBAI: In a big relief for credit card issuers who are facing a rising tide of bad loans since the past few quarters (delinquencies are at nearing double-digit mark now; in June 2024 quarter it soared by 110 bps to 7.6%) the Supreme Court, over the weekend, has given them a free hand to set interest rates for late payments, defaults and even on the outstanding dues.
Not that their hands were tied till now--in a strict legal sense they were, but not in practice as even when the matter was subjudice since February 2009, card issuers were regularly increasing their interest rates which now vary from a low of 45% (3.8% per month) to a high of 55% annually or 4.5% per month on certain cards.
The December 20 ruling by a two-judge Supreme Court bench of Bela Trivedi and Satish Chandra Sharma, goes back to a 2008 order of the National Consumer Disputes Redressal Commission (NCDRC) that capped credit card interest rates at 30% per annum.
The top court ruling has put an end to the 16-year-old case filed by foreign banks like Standard Chartered Bank, Citibank, American Express, and HSBC among others, challenging the NCDRC order on a petition by Awaz Foundation, a non-profit. The apex court had stayed NCRDC order in February 2009.
The Reserve Bank also opposed capping interest rates saying it does not directly regulate banks on rates rather is left to their boards.
Petitioner banks questioning NCDRC’s jurisdiction to fix a ceiling on interest rates said advising interest rate is a statutory field reserved for the Reserve Bank.
NCDRC had said charging interest rates in excess of 30% was an unfair trade practice and said in most markets the rates are under 25%. For instance, in the US it’s just 9.9%, in England it’s 16.9%, Australia (18-24%), and 24-32% in Hong Kong. But in the Philippines, Indonesia, and Mexico, credit card interest rates vary from 36-50%.
“If the RBI is considered to be one of the watchdogs of finance and the economy 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% per annum, in case of default by the credit-card holders to pay before the due date,” the NCDRC had said in its order and capped the annual charges at 30% saying there is no justifiable ground for adopting the highest rate of interest here.
With the 30% cap going, card issuers will now have more flexibility to set interest rates on late credit card payments, according to experts.
The order can lead to higher charges for consumers who miss timely repayments. It also allows issuers to adjust rates based on market conditions and individual risk assessments. Banks now have the flexibility to charge late payment charges higher than 30%, especially from high-risk customers, according to Gauhar Mirza of Cyril Amarchand Mangaldas.
Now card issuers can set interest rates that align with individual credit risks, and customers with poor repayment history may be charged higher rates, helping control defaults. Banks can also structure credit card offerings more competitively without being bound by an arbitrary cap, according to Sanjay Gupta of SNG & Partners.