The credit card holders that are facing troubles as banks are withdrawing the basic facilities have another reason to sigh upon. The Supreme Court has permitted the MNC banks to charge heavy penal interest of up to 49% from credit card holders that defaulted on their payment.
Penal interest rate is a charge that a bank or any lender levies upon a borrower who misses on his repayment. It is basically a penalty for late payment.
Earlier in September 2008, when the credit crunch was influential in the system, National Consumer Disputes Redressal Commission (NCDR) had capped the penal interest at 30% on defaulted payments on credit card purchases. Banks had then requested Supreme Court to cancel this restriction of not charging more than 30% but SC had stayed on their appeal.
On Tuesday, February 3rd, SC decided to pass on a plea by a team of foreign banks including Citibank, HSBC, American Express and Standard Chartered to remove the cap on penal interest. The card issuers said that their business was suffering immensely because of the ‘unwarranted' cap on penal interest and therefore they had appealed to SC to remove the same.
A Bench comprising of Justices B N Agrawal, G S Singhvi and Aftab Alam gave the decision and suspended the respite of credit card holders.
The banks had joined to file a petition with the SC regarding their need to charge penal interest between 36% and 49%. "No bank as a credit card issuer would charge undue interest rate as, apart from the regulatory framework that applies, the market would not sustain the same by reason of competitive force," stated Citibank.
The bank further said that the an individual can avail a credit card facility without any interest for a certain predetermined period and it was only after the expiry of the set period that penal interest is levied on the defaulted payment. "The credit card holder is aware of the same at the time of applying for it. It is also relevant to note that credit card transactions de-facto constitute unsecured credit availed of," added the bank.
Citibank justified that the apex regulator, RBI permits them to charge high penal interest.
On the other hand NCDRC order issued July 7th, 2007 ruled that "charging of interest rates in excess of 30% per annum from 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 unfair trade practices."
Further the order stated that the penal interest could be charged only once for the period of default and should not be levied on the basis of monthly computation of interest rates.
Banks informed that they charged high interest rate on default payments by credit card after registering nearly 27 factors that included SMS alerts sent to the card holders. "The National Commission has failed to appreciate 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% per annum is excessive," said the banks.
The plea made by the banks was allowed because an NGO ‘Awaz', that was also keen in getting the NCDRC order pegged at the penal interest of 30%, did not responded to the notice issued by the SC. This helped the apex court to make the decision in favour of the banks.