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Journalism of Courage
If you have a credit card or are considering getting one, a recent Supreme Court ruling has given you another reason to think twice before defaulting on a payment. A Bench of Justices Bela M Trivedi and Satish Chandra Sharma last week held that the interest rate charged by banks could not be challenged as an “unfair trade practice”.
In doing so, the SC overruled a 2008 decision by the National Consumer Disputes Redressal Commission (NCDRC) which held that banks could not charge interest above 30% per annum. The SC also held that the Reserve Bank of India (RBI) is the only authority that can impose limits on interest rates.
Why did the NCDRC place such a limit? And what were the SC’s reasons for striking it down?
Submissions from both sides
In the case of “Awaz” Punita Society & Ors v. Reserve Bank of India & Ors (2007), the petitioners had filed a complaint stating that certain banks were levying “usurious” (excessive) rates of interest — in the range of 36-49% per annum — for delays or defaults on credit card payments.
This, they claimed, amounted to an unfair trade practice under the Consumer Protection Act, 1986 (CPA). (The old CPA was repealed and replaced by the new CPA in 2019). They also claimed that the RBI was required to issue a circular restricting banks from charging interest above a specific rate.
The RBI, however, argued that although it had already directed banks not to charge excessive rates of interest, its policy was to leave it to the banks to determine the specific rates of interest without directly regulating the subject. Notably, the RBI had issued two directives in May 2007, in response to claims that banks were charging excessive interest rates.
Both stated “It will be appreciated that though interest rates have been deregulated, rates of interest beyond a certain level may be seen to be usurious and can neither be sustainable nor be conforming to normal banking practice”. Neither directive provided a maximum interest rate, and instead simply advised banks to “lay out appropriate internal principles and procedures so that usurious interest, including processing and other charges, are not levied by them on loans and advances”.
The banks themselves — including Citibank and HSBC — argued that only the RBI could prescribe a maximum rate of interest, and otherwise the interest charged was protected under the Banking Regulation Act, 1949. They relied on two specific provisions of the Act to make this argument.
Section 21A states that, “a transaction between a banking company and its debtor shall not be re-opened by any Court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive”. Further, they also cited Section 35A which gives the RBI the power to give binding directions to banking companies in certain circumstances.
The Commission held that banks could be ordered to discontinue an “unfair trade practice” as this term has been defined widely under the CPA to include the use of deceptive or unfair practices “for the purpose of promoting the sale, use or supply of any goods or for the provision of any service”. This, the NCDRC held, could cover the activities of banking companies.
Comparing interest rates with several countries including the US, UK, Australia, and the Philippines, the Commission concluded that 36-49% interest rates were indeed excessive. It also referred to the Supreme Court’s decision in Central Bank Of India vs Ravindra And Ors (2001) which stated “The power conferred by Sections 21 and 35A of the Banking Regulation Act, 1949 is coupled with duty to act (by issuing directives)” and that “Any interest charged and/or capitalised in violation of RBI directives…shall be disallowed and/or excluded from capital sum and be treated only as interest and dealt with accordingly”.
With this in mind, the NCDRC held that “there is no justifiable ground for not controlling the banks which exploit the borrowers by charging exorbitant rates of interest varying from 36 per cent to 49 per cent per annum, in case of default by the credit card holders to pay amount before the due date”.
The court then set a 30% per annum cap on the maximum interest rate that banks could charge. On appeal, this decision was stayed by the SC in 2009.
The SC held that the RBI alone can issue directions to banks to carry out their functions lawfully and fairly. The court’s duty, it held, is merely to ensure this authority is not abused — the court cannot exercise the functions of the RBI on its own.
“However, the National Commission has done just that” it stated. Placing a cap on the maximum interest rate, the court held, “is an encroachment upon the domain of the Reserve Bank of India”.
It also held that the NCDRC effectively re-opened the transaction between the banking company and the debtor which is barred under Section 21A of the Banking Regulation Act. The court explained that the banks had provided all the necessary information to consumers regarding fees and charges that come with owning a credit card in their terms and conditions, and once the consumer is aware of them, the NCDRC “could not have scrutinised the terms or conditions, including the rate of interest”.
The court also disagreed with the Commission on the subject of whether high interest rates would amount to an unfair trade practice. It held that “The Banks have in no manner made any misrepresentation, to deceive the credit card holders” and that there was no material to show how, without violating any RBI directives, charging inflated interest rates would amount to an unfair trade practice.
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