Interest rates in India: 36-49%
Interest rates in other countries The US & the UK: 9.99-17.99% Hong Kong: 24-32%
Australia: 18-24%
Philippines, Indonesia, Mexico: 36-50% |
RBI’s standWe have directed the banks not to charge excessive rates of interest... RBI’s policy is not to directly regulate the rates of interest and has left it to the boards of directors of banks.
Banks’ responseCiti bank: As the RBI has prescribed no standards, the market forces will generate the standards for the rates of interest. HSBC: If we charge 37% interest, much of it is cost; the profit before tax comes to a meagre 2-3%. |
Consumer court’s case• Even in a de-regulated free market economy like America, the maximum rate of interest on credit cards is 13% p.a. Is there a justification to exploit the situation in India? • The PLR declared by banks even after de-regulation in India is 10-15.5% p.a. Charging 36-49% interest isn’t justified • Money lenders are prohibited from charging interest beyond a particular limit. Is there any justification for treating them differently from banks? |
It’s a David and Goliath story— common man against the might of banks and credit card companies. In this story, Goliath almost always wins. Except in rare cases when the common man has the law taking up cudgels on his behalf.
This is what happened recently when the National Consumer Disputes Redressal Commission (NCDRC) came down hard on the banks that were charging exorbitant interest rates of up to 51% on credit card loans. Terming it—charging interest of over 30% when credit card-holders delay or defer payment— as an unfair trade practice, the commission directed the banks to desist from doing so. The court also categorically ruled that banks cannot charge an interest on interest, which means that the interest cannot be capitalised as it cannot be made a part of the principal amount.
Expectedly, the verdict has been criticised, and surprisingly, not all opposition is from the bankers. Some investors say that this is between the banks and customers; in a free market, banks should have the freedom to levy any penal interest they see fit. It’s up to the consumer to prevent it by paying on time or opting for a card that charges a lower penalty. Getting the courts to intervene is virtually an act of a nanny state, they say.
On the other hand, the proponents of the ruling say that charging 51% interest helps nobody. If someone has not paid a card loan, what are the chances that he will be able to pay the over 50% penal interest?
To be fair, the consumer court has not scrapped the levying of penal interest. It has merely said that banks should cap it at 30%. This will allow the banks to make a reasonable profit and, at the same time, make it possible for the customer to repay the loan.
The ruling also takes a dig at the Reserve Bank of India, which has allowed several unhealthy practices on debt recovery to go unchecked. “The RBI has permitted the banks to appoint ‘recovery agents’ on contract without, perhaps, fully appreciating the implications. These ‘recovery agents’ are usually musclemen, and employing them increases nothing but goondaism,” it states.
The banks, of course, claim that the high penal interest rates will be charged only as long as the credit card market in the country is in its present state. They imply that once the market matures, that rates will become more realistic. The NCDRC is acerbic in its rebuttal: “If the credit card market in India is not “mature”, it is because so far this market has been mostly created, driven and operated by the banks and for the banks—with unsolicited and alluring offers of credit card facilities at the marketing frontend, and undisclosed, fine-printed sets of one-sided conditions of credit at the back-end, couched in jargon and phraseology, which even erudite scholars of the English language, law and finance would find rather obtuse and opaque.”
The upshot is that the NCDRC has ruled that banks cannot charge above 30% as penal interest. “The benchmark prime lending rate declared by various banks, even after deregulation in India, varies from 10-15.50% per annum. In such circumstances, to contend that banks can charge an interest at the rate of 36-49% cannot be justified,” states the NCDRC.
Banks maintain that even at the current high rates of interest, they make very little by way of profit. For instance, HSBC, in its submission to the NCDRC, says that of the 37% interest it charges, most is cost and the profit before tax comes to a meagre 2-3%. Citibank too has rebuffed the NCDRC contention, saying, “The rate of interest on defaulted or partial payments 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 36-49% a year is excessive.”
AmEx trotted out the “mature markets” reason in its response: “Emerging markets like India also have a high cost of acquisition and high cost of servicing an account compared with other mature markets. Besides, the market in India is still at a developing stage and there are slim chances of recovery against defaulters in view of the legal complexities involved.”
HSBC also added that the high rates were intended to take care of a number of “free” valueadded services, including roundthe-clock call centres and customer assistance, phone banking, free e-mail and mobile phone alerts, and the like. There’s little doubt that the banks will appeal against the ruling, possibly in the country’s highest court. And given their sheer financial muscle, chances are that they will prevail. However, consumers should not be disheartened; the NCDRC ruling proves that there is someone looking out for their interests.
