Supreme Court Sets Aside NCDRC Judgment Barring Banks From Charging More Than 30% Interest On Credit Card Dues

The Supreme Court today (December 20) set aside an order dated July 7, 2008, passed by the National Consumer Disputes Redressal Commission in Awaz & Ors v. RBI, whereby it held that charging of interest between 36% per annum to 50% per annum from the credit card holders is usurious/excessive rate of interest. The Commission set up a cap of 30% as the rate of interest on credit cards. 

The NCDRC held that it amounted to unfair trade practice because if considering the bargaining position of the banks and the credit card holders, the latter had no bargaining capacity except to not accept the facility of a credit card. Further, it had held that for having a credit card, there is throughout an inducement by the bank through various marketing tactics.

Therefore, if a condition requires a consumer to pay a disproportionately high sum as compensation if he fails to fulfil his obligation, it would amount to unfair trade practice. The Commission then went to compare the interest rate on credit cards in other countries such as the United States, the United Kingdom and Australia. It found that in the United States of America and the United Kingdom, the interest rate for the credit card ranges from 9.99 per cent to 17.99 per cent.

In Australia also rate of interest varies from 18 per cent to 24 per cent. In Hong Kong SAR, credit card interest varies from 24 per cent to 32 per cent. In the Philippines, Indonesia and Mexico, which are emerging markets, the credit card interest rate varies from 36 per cent to 50 per cent. However, the Commission went on to hold that there is no justifiable ground for adopting the highest rate of interest prevailing in smaller economies.

Further, it held that there is no justifiable ground in not even attempting to follow what is prevailing in developed countries, namely, the rate of interest at 9.99 per cent to 17.99 (USA and UK) or 18 per cent to 24 per cent (in Australia).

The Commission then went on to set an upper cap of 30% interest rate on credit card. It held: "charging of interest in excess of 30 per cent shall be considered usuries rate of interest and that if such rate of interest is charged it would amount to unfair trade practice." It also held that penal interest can be charged only once for one period of default and shall not be capitalised.

Further, charging interest with monthly rests is also an unfair trade practice.

A bench of Justices Bela M. Trivedi and Satish Chandra Sharma set aside the 2008 order, and allowed the present batch of civil appeals preferred by Hong Kong Shanghai Corporation, Citibank, American Express Banking Corporation, Standard Chartered Bank, along with the Intervenor, Housing Development Finance Corporation. The Appellants argued that determining the reasonability and 'fixing of the maximum or the minimum rates of interest', is the exclusive function of the Reserve Bank of India (RBI).

What did the Supreme Court decide?

The Supreme Court held that a policy decision pertaining to the rate of interest, and trade practices carried out by the banks across the country, is a regulatory function within the specific statutory domain of the Reserve Bank of India and cannot come under the purview of judicial scrutiny by the National Commission. It held: "an administrative policy decisions of banks, do not constitute provisions/facilities of banking, which may come under the umbrella of 'service', defined under section 2(1)(o) of the Consumer Protection Act, 1986".

Further, the Court held that the supervisory role over the banks is exclusively statutorily entrusted to the RBI. In this regard, the Court said: "The National Commission has assumed jurisdiction and expertise over the Reserve Bank of India, whilst observing that a ceiling on the rates of interest, is the purported solution to the alleged exploitation of credit card holders. It has made observations, that are contrary to the legislative intent of Section 21A of the Banking Regulation Act, 1949 that provides for a statutory bar on any court/tribunal to re-open transactions, that the rate of interest charged by the banking company in respect of such transaction is excessive." 

As for the rate of interest set for credit card holders, the Supreme Court held the credit card holders in the present case are well-informed and educated and had expressly agreed to be bound by the terms issued by the respective banks. It observed: "The banks in the most important terms and conditions, as provided by the Banks have provided all necessary information with regard to fees, and charges applicable to credit cards, credit and cash withdrawal limits. We are of the considered opinion that once the terms of the credit card operations were known to the complainants and disclosed by the banking institutions before the issuance of the credit cards, the National Commission could not have scrutinized the terms or conditions, including the rate of interest. More-so, the Respondent has not approached the statutory authority, the Reserve Bank of India, for any objection against the rate of interest, or the high Benchmark Prime Lending Rate."

The Court stated that the attempt of the Commission to re-agitate the terms and conditions of credit card facilities provided by the banks, and re-write the terms thereof, including the rates of interest charged by the banks, is exorbitant, however reasonable, is an attempt by the National Commission to constitute a new contract, which is impermissible in law.

Lastly on whether the excessive rate of interest amounted to unfair trade practice, the Court held that an act can be condemned as an unfair trade practice, or not, the key is to examine the 'modus operandi' i.e. whether there is any false statement/ misrepresentation, or deception. However, in the present case, 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," the Court averred.

Case Details: HONGKONG ANDSHANGHAI BANKING CORP. LTD. v AWAZ . AND ORS., C.A. No. 5273/2008 & Ors 

Citation: 2024 LiveLaw (SC) 1034

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