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NATIONAL CONSUMER DISPUTES REDRESSAL COMMISSION
M.B. Shah, President, Rajyalakshmi Rao and Anupam Dasgupta, Members
AWAZ AND ORS. - Appellants
Versus
RESERVE BANK OF INDIA AND ORS. - Respondents
Complaint Case No. 51 of 2007 with Revision Petition No. 1913 of 2004 (From the Order dated 6.5.2004 of the State Commission, Madhya Pradesh in Appeal No. 1706/03)
Decided on : 07-07-2008
Ms. Indu Malhotra, Senior Advocate as Amicus Curiae with Mr. Abhinav Agnihotri, Advocate Mr. J. K. Mittal, Advocate as Amicus Curiae., for the Appellant; Mr. Mayur R. Shah, Advocate, Mr. Jaideep Gupta, Senior Advocate with Mr. H. S. Parihar and Mr. K. S. Parihar, Advocate, Mr. Sanjeev Puri, Senior Advocate with Mr. Sanjeev Malhotra and Mr. Pranav Vyas, Advocate, Mr. Altaf Ahmed, Senior Advocate with Mr. R.S. Suri, Mr. Rahul Malhotra, and Mr. Gurinder Suri, Advocate, Mr. Sanjay Gupta, Mr. Ajay Monga and Mr. Ateev Kumar, Advocate, for the Respondent
Charging interest in excess of 30% p.a. from credit card holders is an unfair trade practice and amounts to exploitation of the borrowers/debtors. Penal interest can be charged only once for one period of default and shall not be capitalized. Charging of interest with monthly rests is also an unfair trade practice.
Headnote:
RBI - Charging of Usurious Interest Rates - Banking Regulation Act, 1949, Section 35A - The court found that charging interest at rates in excess of 30% p.a. from credit card holders by banks for failure to make full payment on the due date or paying the minimum amount due is an unfair trade practice. Penal interest can be charged only once for one period of default and shall not be capitalized. Charging of interest with monthly rests is also an unfair trade practice. The banks are directed not to indulge in the aforesaid unfair trade practices or repeat them.
Fact of the Case:
The case involved a complaint and a revision petition questioning whether the Reserve Bank of India (RBI) is required to issue circulars prohibiting banks from charging interest above a specific rate and whether banks can charge credit card users interest at rates ranging from 36% to 49% per annum for default in payment. The court considered the aggressive marketing practices of banks inducing customers to take loans, the ill-effects of unaffordable EMIs, and the role of the RBI in regulating interest rates.
Finding of the Court:
The court found that charging interest at rates ranging from 36% to 49% p.a. is exorbitant and amounts to exploitation of the borrowers/debtors and is usurious. It also determined that charging interest in excess of 30% p.a. from credit card holders is an unfair trade practice. The court directed the banks not to indulge in the unfair trade practices or repeat them.
Issues: The issues involved whether the RBI is required to issue circulars prohibiting banks from charging interest above a specific rate and whether charging interest at rates ranging from 36% to 49% p.a. amounts to usurious rates of interest.
Ratio Decidendi: The court held that charging interest in excess of 30% p.a. from credit card holders is an unfair trade practice. It also determined that penal interest can be charged only once for one period of default and shall not be capitalized. Charging of interest with monthly rests was also deemed an unfair trade practice.
Final Decision: The complaint was allowed, and the revision petition was disposed of accordingly. The court directed the banks not to indulge in the unfair trade practices or repeat them. There was no order as to costs.
ORDER
M.B. Shah, President - In the aforesaid complaint and revision petition, the questions, which require consideration are:
(1) Whether the Reserve Bank of India (hereinafter referred to as the RBI) is required to issue any circular or guidelines prohibiting the Banks/Non-Banking Financial Institutions/money lenders from charging interest above a specific rate
At this stage itself, it needs to be noted that, on the one hand, the rapid expansion of banking facilities and of access to credit facilities and on the other hand, it has led, as a result of the aggressive marketing practices adopted, especially, by the banks, which induce the unsuspecting customers to take loans, in one form or the other, for purchasing consumer goods and durables even when they are not quite needed. This makes these consumers debtors forever. Such indebtedness results in constant tension to repay the loans and the "EMIs" at times well beyond the borrowers /debtors' repaying capacity. The ill-effects of unaffordable EMIs are now being highlighted in the print and other media almost daily. In the case of motor vehicle loans, for example, the debtor/borrower is under constant tension that if he fails to pay one or two instalments, he would receive threats from the so-called "recovery agents" of the banks. The RBI has permitted the banks to appoint "recovery agents" on contract, without perhaps fully appreciating the implications that these "recovery agents" are usually musclemen, employing whom increases nothing but goondaism.
(2)(a) Whether banks can charge the credit card users interest at rates ranging from 36% to 49% per annum if there is any delay or default in payment within the time specified
(b) Whether interest at the above stated rates amounts to charging usurious rates of interest
In our view, prima facie, charging of interest at rates ranging from 36% to 49% p.a. is exorbitant and amounts to exploitation of the borrowers/debtors and is usurious.
Oral Submissions
2. Whether the RBI can issue any directions
(a) Ms. Indu Malhotra, learned Senior Counsel appearing on behalf of the complainants as amicus curiae, has submitted that charging the credit card holders interest at the rates of 36% to 49% p.a. for their default in payment is, on the face of it, usurious. She has referred to various circulars issued by the RBI wherein it is acknowledged that the RBI has been receiving many complaints with regard to banks charging excessive rates of interest and that by these circulars the RBI has directed the banks not to charge such high rates of interest. She has further submitted that considering the prime lending rates fixed by various banks, it is the duty of the RBI to issue a circular directing that interest should not be charged at rates far beyond a reasonable limit.
(b) As against this, Mr. Jaideep Gupta, learned Senior Counsel appearing on behalf of the RBI has submitted that the RBI has already directed the banks not to charge excessive rates of interest. He has, however, clarified that at present the policy of the RBI is not to directly regulate the rates of interest charged by the banks and, therefore, the RBI has left this matter, subject to the aforesaid advisory, to the Boards of Directors of the banks. Hence, the RBI cannot be directed to issue any further instruction as it is a discretionary power conferred under the Banking Regulation Act, 1949.
(c) Mr. Altaf Ahmed, learned Senior Counsel appearing for the Citibank (opposite party No. 4) has submitted that it is the function of the RBI to prescribe the maximum rate of interest by exercising its powers under Section 35A of the Banking Regulation Act, 1949. If there is failure on the part of the RBI to do so, banks cannot be held liable. He has further submitted that if the RBI is satisfied that in public interest or in the interest of banking policy or to prevent the affairs of the banking companies being conducted in a manner detrimental to the interest of the depositors it is necessary t
