New Delhi: The Supreme Court of India has refused to grant a stay order against the National Consumer Forum that has sought to restrain banks from charging over 30 per cent interest per annum on defaults on card payments.

The National Consumer Forum had issued the directive to protect consumers from exorbitant credit card charges, sometimes as high as 49 per cent, which basically trap the consumer in a never-ending cycle of rotating debt.

A consortium of card-issuing foreign banks, who had been restrained by the forum have approached the Supreme Court against the order, contending that they are free to decide interest rates on credit card dues. The card-issuing foreign banks who have moved the Supreme Court are Citibank NA, Hongkong Shanghai Banking Corp, Standard Chartered Bank and American Express Bank.

The National Consumer Disputes Redressal Commission had restrained these banks from charging interest over the rate of 30 per cent per annum to credit card holders who fail to make full payment on the due date.

The consortium of foreign banks challenged the consumer court's directive, claiming that capping of interest rates on credit card payment was contrary to the policy of the Reserve Bank of India, which allows banks to determine rates of interest on non- priority sector personal loans, without reference to the 'benchmark prime lending rate' (BPLR), irrespective of the size of loan.

The Indian Banks Association (IBA), in an intervention application said that interest rates charged by banks were not subject to judicial scrutiny.

The Reserve Bank, vide circular dated 23 July, 2008, had informed banks that they can prescribe their respective ceiling rate of interest in respect of small value personal loans and credit card dues.

While admitting the petitions, a two-judge bench of Justice B N Agrawal and Justice G S Singhvi issued a notice on the interim applications by the banks praying for a stay on the consumer court's order. The bench also allowed the intervention application filed by the IBA.

Though the card-issuers were seeking a stay on the national consumer forum's directive, the Bench has issued to the Reserve Bank of India, and to the non-government organisation (NGO) 'Awaz', on whose petition the limit on interest rate was imposed, directing them to respond within three weks.

The banks have cited as many as 27 different reasons to justify charging higher interest rates on credit card defaulters on account of the cost of making calls to recover the payments, as well as the cost of making unsolicited calls from service centres to new customers, which are themselves a nuisance to the public, against which previous measures, including a national do-not-call registry has been set up.  (See: RBI cracks the whip on credit card issuers)

Other costs put forth by the banks as the justification for charging punitive interest rates to defaulters of credit cards include the cost of setting up a card operating system, card embossing and courier (delivery) charges, phone banking costs, printing and postage costs for sending monthly statements, costs for providing internet banking facilities, waiver of late charges and interest on account of service issues, costs incurred by way of marketing and promotional offers, and the cost of maintaining loyalty and rewards programmes.

Almost all costs of the banks' operations using the telephone and internet are charged to credit card holders, according to by the banks' submissions before the Supreme Court.

In its 7 July 2007 order, the Consumer Disputes Redressal Commission (NCDRC) had said the charging of interest rates in excess of 30 per cent of annum on credit card outstandings in case of the card holder's failure to make a full payment on the due date, or paying the minimum amount due, as an ''unfair trade practice''.

The consumer forum has also said that penal interest could be levied only once, and that too only for the period of default, and should not be capitalised, as it is being done presently. It had also deemed the practice of computing interest on monthly basis as "unfair trade practice".

Arguably, most of these costs are the costs of doing business, and are not specific to the defaulters, as these services are used by the rest of the banks customers as well. Also, marketing, rewards and loyalty programmes serve the interests of banks, more than they do of the card holders. (See: Loyalty is overrated)

However, the banks continue to argue that the National Forum ''has failed to appreciate that the rate of interest on defaulted or partial payments of dues is determined by taking into consideration various factors, including the risks of default''. This, they argue, is the reason that the commission is not adequately competent to determine whether punitive interest rates ranging from 36 per cent to 49 per cent per annum is excessive.