
The Supreme Court on Friday overturned a 2008 decision by the National Consumer Disputes Redressal Commission (NCDRC) that prohibited banks from charging more than 30% interest on overdue credit card payments.
A bench comprising Justices Bela M. Trivedi and Satish Chandra Sharma ruled against the NCDRC’s earlier judgment, which deemed it an unfair trade practice for banks to impose interest rates exceeding 30% on credit card dues during delayed payments.
Background of the Case
The Supreme Court was hearing a petition challenging the NCDRC’s decision in the Awaz and Others vs. RBI case. The key questions before the NCDRC included:
- Whether banks could charge interest rates between 36% and 49% annually on credit card defaults.
- Whether such rates constituted usurious practices.
- Whether the Reserve Bank of India (RBI) should issue specific guidelines to prohibit banks and financial institutions from charging excessive interest rates.
In its 2008 ruling, the NCDRC concluded that charging interest above 30% was excessive and exploitative. It criticized banks for imposing exorbitant rates on borrowers who failed to clear their credit card dues on time.
RBI’s Stand
The Reserve Bank of India (RBI) clarified during the proceedings that while it discourages excessive interest rates, it does not directly regulate the rates charged by banks. Instead, it leaves such decisions to the discretion of banks’ Boards of Directors, as permitted under the Banking Regulation Act, 1949.
The RBI stated, “We have issued circulars advising banks not to charge excessive rates, but determining specific thresholds is left to the banks.” The central bank argued that it could not be compelled to issue further instructions, as such powers are discretionary under the law.
NCDRC’s Criticism of RBI
The NCDRC had criticized the RBI’s approach, stating that as a financial watchdog, it should intervene in cases where borrowers are exploited through high interest rates. The commission remarked, “Charging interest rates ranging from 36% to 49% per annum in case of default is exorbitant and requires policy intervention.”
The commission also pointed out that while the RBI had issued advisories against usurious rates, it failed to define what constitutes such rates.
Supreme Court’s Decision
The Supreme Court, in its judgment, set aside the NCDRC’s findings. The apex court emphasized that the RBI has the authority to guide banks but cannot be forced to impose rigid caps on interest rates. This decision effectively restores the discretion of banks to set interest rates on credit card dues, subject to their internal policies and RBI advisories.
This ruling has significant implications for both credit card users and financial institutions, reinforcing the autonomy of banks while leaving room for further regulatory oversight by the RBI.