Citi fights bid to cap credit card interest

Citi fights bid to cap credit card interest
All credit card users should make a mental note of a case that has come up before the Supreme Court. The verdict the apex court gives will decide the interest consumers have to pay on card outstandings.
Citibank NA has moved the Supreme Court, challenging an order of the National Consumer Disputes Redressal Commission, which restrained the bank from charging an interest rate of over 30 per cent a year to credit card holders who fail to make full payment on the due date.
A bench comprising Justice BN Agrawal and Justice GS Singhvi on Friday said that the matter will be heard on September 8. The court refused to hear the plea of the bank on an urgent basis.
The matter, which relates to a balancing of consumer protection and regulatory powers, assumes importance given the fierce growth of credit card use, overspending and delinquency in recent years. Notably, similar issues had resulted in new legislations in advanced markets.

In an appeal filed through counsel RS Suri, Citibank said that such capping of rates of interest on credit card payment was contrary to RBI policy. The US-based bank pointed out that the central bank in its circular of July 23, 2008 had said that banks prescribe their respective ceiling rate of interest in respect of small-value personal loans and this would apply to credit card dues as well. RBI had clearly stated that banks were free to determine rates of interest on non-priority sector personal loans without reference to the Benchmark Prime Lending Rate (BPLR) and regardless of the size of loan.
"The imposition of an upper cap of interest to a degree turned non-priority sector lending to priority sector lending," said Citibank. Further, "the commission failed to appreciate that the market in India is still at a developing stage and the risk of default is relatively high, and legal remedy has its own costs. An emerging market like India also has a high cost of acquisition and a high cost of servicing an account as compared to other mature markets," said Citibank.
It may be mentioned that in markets like the US, there are legislations like the Truth in Lending Act — which requires banks to state upfront all charges on the product — primarily to enable the consumer to shop around for the best deal. In the UK, the Fair Trade Commission, formed under the Consumer Credit Act, ensures that there is a fair deal between the consumer and the bank.

Banks argue that credit card is a transnational product and the level of interaction between the bank and customer is intensive, for which the bank engages a large workforce to facilitate customer services. For example, Citibank receives 700,000 calls per month on its helplines, in addition to about 65,000 emails and 15,000 letters per month from card holders, said the appeal.

The appellant bank also picked holes in the Commission order, which had said that the penal interest can be charged only once for one period of dafault and shall not be capitalised.
"The interest accrues on the aggregate of the outstanding due amounts for the period for which it remains due and no penal interest is levied. Capitalisation of interest connotates utilisation of the principal amount of the loan towards the payment of interest which is not the scenario that applies to credit card dues. In case of credit-card dues, credit availed of and the entire amount remaining overdue is liable to the payment of interest," said the bank.
The Commission's findings that charging of interest with monthly rates as unfair trade practice was also arbitrary, said Citibank.
"The Commission has no jurisdiction to hold that the charging by banks of interest at monthly rests was an unfair trade practice given that credit card dues are unsecured and of indeterminate tenor, and the levying of interest at monthly rests is in any event harmonious with the monthly billing and payment cycles. When the billing and payment cycles are monthly, it is also of no benefit to the credit card user to pay accredited interest at rests that are not synchronized with the billing and payment cycles," said Citibank. On July 7, 2008, the Commission had passed the order following a complaint by a credit card holder.