UNFAIR TRADE PRACTICES BY BANKS –ROLE OF ‘RBI’

 

It was a land mark judgement by the National commission which has created a storm among the banking authorities and even the Reserve Bank of India .Though National commission’s this order may  still go to the Apex court for further clarification but National commission has already referred to the earlier order of the Supreme Court while discussion on the subject and quote/citation /extract from the Supreme Court order and decision on the same lines in a way gives approval to this order and it is likely to get approval from the Apex court even if it goes in appeal .

 

National consumer dispute redressal commission held in its recent judgement dt 1st July 2008

 

!)That charging of interest rates in excess of 30%p.m. from the credit card holders by the banks for the former’s 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 capitalised.

 

!!!)Charging of interest with monthly rests is also an unfair trade practice .

 

!V) Hence, the banks are directed not to induldge in the aforesaid unfair trade practices or repeat them

 

                 The total focus in the present case was on credit card facilities offered by the banks  and the rate of interest charged from the defaulter card holders and the main question to be decided was as to whether by charging so high rate of interest, this practice of the banks amounts to unfair trade practices and   whether the consumer commission has the jurisdiction to deal and decide the issue of rate of interest  when RBI is the authority to decide such matters and banks are governed by  Banking Regulations Act 1949..It required a good debate and as many as 21 Advocates for four banks and RBI,DCM Financial services and other complainat/defendants came ahead to argue on this issue of vital importance .A team   from emicus curiae for complainants  put all efforts and provided all relevant material to the commission to come to some logical conclusion on the subject .

 

It was a complaint case no. 51 of 2007 filed by Awaz, Punita Society ,Ahmedabad and others  against Reserved Bank of India & four  other banks . There was also a Revision petition no. 1913 of 2004 [Arising out of the order dt 6.5.2004 of the Madhya Pradesh State Commission in appeal no. 1706 of 2003 which came before the National commission with a issue  of charging of interest rates as high as from 36% to 49% p.a. by the banks from the credit card users delaying or defaulting in making timely payments .and thereby Banks induldging into unfair trade practices. 

           

The defendant banks were HSBC,CITI BANK ,AMERICAN EXPRESS, STANDARD CHARTERED BANK & RBI who fought their case tooth and nail.

 

While making submissions for the complainant ,advocate for complainants refered to various circulars issued by RBI wherein it is acknowledged that RBI had been receiving number of complaints against various banks who had been charging exorbitant rate of interest from the card users in case of their default in making timely payments or part payment .It was contended by the complainant that it is the duty of the RBI to issue directions to the banks that interest should not be charged beyond the reasonable limit. In response to the allegations RBI  stated that they have already issued circulars and guidelines as per the powers conferred on it under sec.35-A of Banking Regulation Act 1949 but at the same time RBI is not to directly regulate the rate of interest as by the same act Board of Directors of the banks have discretionary power to decide how much rate of interest is reasonable under the circumstances in each type of cases.RBI also in defence stated that it is not possible for RBI to determine whether a particular rate of interest would be ipso facto excessive or not .That would depend upon facts and circumstances of each transaction ,the nature and profile of the customer to whom the credit card has been issued as well as other factors which cannot be monitored by the RBI  It is also contended that action taken by RBI in relation to the credit cards is regulatory in nature and cannot be made subject matter of the proceedings before the commission as this commission has no jurisdiction to declare the guidelines and instructions issued by RBI under the power conferred by the banking regulation act 1949 as arbitrary,irrational or amounting to unfair trade practices.However

 

 Citibank ,opposite party no -4 submitted that it is the function of the RBI to prescribe maximum rate of interest by exercising its power and if RBI fails to do so ,banks cannot be held liable.

 

On the other hand HSBC took different view in defence stating therein that rate of interest charged by the banking companies cannot be  subjected to the scrutiny of the courts..Reference . was made to the apex court cases ;State Bank of Hyderabad v Avath sakru &anr. AIR 1994 a.p 170 :Syndicate Bank ‘s case ; Central Bank of India v Ravindra &others[ 2002 ]1 scc 367 It is further submitted that HSBC had been following the guideline issued by RBI and in case HSBC fails to comply with the guidelines issued by RBI then only can be said to be defaulter .

 

.American express bank alleged that consumer fora have no jurisdiction to determine the fixing of rates of interest on cards  contrary to the directives of the RBI under the statutary provisions .Consumer protection does not provide for interference in the functioning of regulatory body,the RBI. .The appropriate remedy can be to approach the  high court under article 226 and not the consumer for a. As long as banks are functioning within the four corners of statutary guidelines under the Banking Regulations Act 1949 ,there is no cause of action available to even assert a plea of unfair trade practices .More so ,the credit card holders are in the nature of high risk unsecured lending and hence there is jurisdiction of higher rate of interest.

 

Standard Bank also took the same pleas as city bank and others .

 

Inspite of all arguments and pleas by all the four banks and RBI ,National commission came to the following concusion which are well supported by the earlier orders by the Apex court through it judgements .Commission has considered ,heard and appreciated all the points and justifications extended by all the defendants including RBI while giving its opinion on the subject as given hereunder:

 

1.      The apex court Supreme court of India while deciding similar case in 2002 in the matter of Central Bank of India v Ravindra and others [2002] 1 SCC 367  had dealt with the similar situation and HELD

 

“ The reserve bank of India may give directions as to the rate of interest and other terms and conditions on which advances or other financial accommodation may be made.`Such directions are binding on every banking company. Section 35-A also empowers RBI to direction in general or in particular case in the public interest or in the interest of banking policy which is also binding on all the banks.The reserve bank of India is one of the watchdogs of finance and economy of the nation and it is and ought to be aware of all relevant factors including credit conditions as prevailing which would invite its policy decisions.  ”

 

In such circumstances if the Banking Regulation Act 1949 requires that the RBI shall discharge certain functions in the public interest and if RBI does not discharge such functions ,it would amount to unfair trade practice .In the present case  unfair trade practices are alleged against banks by the complainants,hence final order is against banks .

 

In this context RBI is required to be considered in the context of observations made in Lucknow Development Authority v M.L.Gupta 1993 CTJ 929 [SC] [CP]1994 1 SCC 243 “ An ordinary citizen or a common man is hardly equipped to match the might of the state or its instrumentalities . In fact to meet the long felt necessity of protecting the common man from such wrongs for which remedy under ordinary law for various reasons has become illusory ,the importance of this act lies in promoting the welfare of the society .” Hence consumer for a being a welfare legislature has to come ahead in protection to the interest of consumers.

 

2.      The Apex court further pointed ;

 

“several unhealthy practices having slowly penetrated into prevalence .Banking is an organised institution and most of the banks press into service long -running documents wherein borrowers fill in blanks ,at times without caring to read what has been provided therein and bind themselves. Suffice it to observe that such issues shall have to be left open to be adjudicated upon in appropriate case as and when arising for decision . ”

 

             Therefore the present  case of charging such high rate of interest must be open to adjudication on the basis of the observation made by the Apex court.and  also as per RBI’s admission /consent/approval  in their written submissions in the present case  “that the consumer fora would be entitled to adjudicate upon the question whether the rate of interest charged by any specific bank amounts to unfair trade practice and can issue consequental directions based on the finding of the  forum/ commission”

 

3.      Now coming to the justifications given by HSBC and supported by other banks that in India giving credit information asymmentry and resultant comparatively higher costs of ascertaining the credit worthiness of individuals availing of facility of credit card as well as other cost of operation ,the rates of interest charged are fully justified. That means till the credit card market in India becomes competitive and mature, bank should be permitted to exploit the situation .Such contention is not acceptable to the commission and going ahead with such motive itself is unfair trade practice .Going by the data given by the banks in their defence and comparative study given about  other countries ,there is no justification to charge 36% to 49% rate of interest when it is observed that even in developed countries ,rate of interest at 9.99% to 17.99% in USA &UK or 18%to 24% in Australia

 

Hence the banks were directed not to indulge in the afore said unfair trade practice or repeat them

[SC later on in its judgement in the present case held-terms and conditions signed by the subscriber are binding upon him ]

Author:

Dr Prem Lata,Member Consumer Forum Delhi

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