Credit cards need better regulation

The credit card is a convenient option to make payments for goods and services that one may require every now and then.

It does not add to one's bill at least directly, as most shop keepers and service providers do not charge anything extra for its use. Credit-card companies/banks normally even provide a free credit period of up to 45 days.

Though one can use the credit card to his or her advantage, there are pitfalls arising from the ignorance of the cardholder and also the greed and callous attitude of the card-issuing companies/banks.

There are various instances of even flouting of guidelines issued by the Reserve Bank of India.

Use of local language

Though there are RBI guidelines stipulating that while issuing cards, the terms and conditions for issue and use of a credit card should be mentioned in clear and simple language (preferably in English, Hindi and the local language), banks do not use the local language and the cardholders in most cases may not understand the (small) fine print in English.

If one were to give weight to the spirit of the circulars, banks ought to be informing customers of all the changes in their local language also in a readable format.

Credit-card dues are in the nature of non-priority-sector personal loans and, hence, banks should be charging interest based on the base rate system effective from July 1, 2010. Ideally, the credit-card interest should be linked to the base rate of the bank.

As and when the changes in the base rate happen, interest charged on the card must also change accordingly. But banks do not mention how the interest on the card is linked to the base rate and they do not follow the RBI guidelines to this effect.

The central bank has also stipulated that card issuers should quote annualised percentage rates on card products with necessary examples. As against this, there are credit-card statements that do not quote the APR, even though they provide examples for such calculation.

The central bank has similarly directed that a legend/notice to the effect that “making only the minimum payment every month would result in the repayment stretching over … years with consequent interest payment on your outstanding balance” should be prominently displayed in all the monthly statements. This is only to cauction customers about the pitfalls of paying only the minimum amount due. Some of the banks do not, however, adhere to this direction.

It is reported that the APR in some cases ranges from 37 per cent to 42 per cent. The current monthly compound interest rate ranges from 3.1 per cent to 3.5 per cent.

An additional service tax of 10.3 per cent is also levied to arrive at the outstanding. Banks generally issue a monthly interest rate, but how they compound it for every cardholder depends on individual banks.

The rates vary across cards and banks. As they publish monthly and not yearly figures, if the credit that is taken is not repaid in time, the compounding effect will make it costly.

However, as banks do not come under the purview of the Usurious Loans Act, no action is initiated on this count. This, despite it being a lending practice that can well be termed as predatory lending.

Who will come to the rescue of the aam aadmi ? A bank cannot be allowed to suck the blood of the common man in the form of interest.

It will not be out of place to mention here the RBI directive on interest rates.

It stipulates as follows: “Though interest rates have been deregulated, charging of interest beyond a certain level is seen to be usurious and can neither be sustainable nor be conforming to normal banking practice. Boards of banks have, therefore, been advised to lay out appropriate internal principles and procedures so that usurious interest, including processing and other charges are not levied by them on loans and advances.”

Misleading brochures

A brochure explaining features of a credit card issued by a bank mentions there is “no interest” on cash withdrawal. But if you look at the most important terms and conditions for their credit card, you will come to know that this is not a free service.

Actually the bank charges what it calls “transaction fee for cash withdrawal” at 3 per cent of the transaction amount subject to a minimum of Rs 30 for every Rs 1,000 or part thereof.

A note under the most important terms and conditions for credit card contains the following clause: “All fees/charges are subject to change and at the discretion of the Bank. The changes in fees/charges and the effective date will be indicated in the bills. Bills will be generated only when there is a billable transaction for the billing month. Hence in the event bill is not generated for want of billable transaction, the modified levy, modified fees/charges is deemed to have been conveyed to the cardholder.”

This clause provides the banks all the rights not only to amend the fees/charges but also do it without even informing the cardholder.

Time for payment

The RBI has stipulated that card issuers should ensure that there is no delay in despatching bills and the customer has enough time (at least a fortnight) for making payment before the interest starts getting charged.

It has also been suggested that in order to obviate frequent complaints of delayed billing, the credit-card issuing bank may consider providing bills and statements of accounts online. Further, it was suggested that banks must consider putting in place a mechanism to ensure that the customer's acknowledgement is obtained for receipt of the monthly statement.

However, some banks which send statements by courier/post do not provide this minimum fortnight time. For example, this writer has received a statement dated May 21 on May 24 when the payment date is fixed as June 4.

One expects that the central bank will conduct necessary inspection of the credit-card issuing banks, ensure the instructions issued by it are followed in letter and spirit, and also that it imposes penalty on defaulters for violation.

(The author is a retired banker.)

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