Source: Indian Express 

Introduction 

The Supreme Court has overturned a 2008 National Consumer Disputes Redressal Commission (NCDRC) order that had capped credit card interest rates at 30% per annum. This ruling effectively gives banks the freedom to charge higher interest rates on credit card dues, while firmly establishing that the Reserve Bank of India (RBI) is the sole authority to regulate such matters. The decision raises important questions about consumer protection, banking regulation, and the balance between market forces and regulatory oversight in India's financial sector. 

What is the Background and Court Observation of the Hongkong Andshanghai Banking Corp. Ltd. v. Awaz. And Ors.? 

Background: 

• The impugned matter arose from a petition before the National Consumer Disputes Redressal Commission (NCDRC) wherein it was contended that banks were charging usurious interest rates ranging from 36% to 50% per annum on credit card dues. 
• Pursuant to the petition, the NCDRC, vide its order dated 7th July, 2008, imposed a ceiling of 30% per annum on credit card interest rates, holding that charging interest beyond said rate constituted an unfair trade practice under the Consumer Protection Act, 1986. 
• The NCDRC drew comparisons with interest rates prevailing in developed economies such as the United States (9.99% to 17.99%), United Kingdom (9.99% to 17.99%), and Australia (18% to 24%), to establish the unconscionable nature of higher rates in India. 
• The Commission further held that penal interest could be charged only once for one period of default, shall not be capitalized, and charging interest with monthly rests constituted an unfair trade practice. 

Court’s Observations: 

• The Hon'ble Supreme Court, while setting aside the NCDRC order, held that policy decisions pertaining to interest rates and banking trade practices fall within the exclusive statutory domain of the Reserve Bank of India and are beyond the purview of judicial scrutiny by the National Commission. 
• The Apex Court observed that administrative policy decisions of banks do not constitute provisions/facilities of banking that may come under the umbrella of 'service' as defined under Section 2(1)(o) of the Consumer Protection Act, 1986. 
• The Court determined that the credit card holders, being well-informed and educated consumers who expressly agreed to the terms issued by respective banks, cannot subsequently challenge the same before the consumer forum, particularly when the terms and conditions were explicitly disclosed prior to card issuance. 
• The Court further held that the attempt by the National Commission to re-agitate the terms and conditions of credit card facilities and rewrite them, including the rates of interest charged by banks, amounts to constituting a new contract, which is impermissible in law and contrary to Section 21A of the Banking Regulation Act, 1949. 
• The Supreme Court observed that for an act to constitute an unfair trade practice, the essential prerequisites of 'deceptive practice' and 'unfair method' must be established, which were manifestly absent in the present case as banks had made no misrepresentation to deceive credit card holders. 

What are the Legal Provisions Referred to in this Case ? 

• Consumer Protection Act, 1986: 
  • Section 2(1)(o) - Definition of 'Service': 
    • This section defines what constitutes a 'service' under consumer protection law. 
    • The Supreme Court clarified that administrative policy decisions of banks regarding interest rates do not fall within this definition. 
    • The court held that these are regulatory matters outside the scope of consumer protection law. 
• Banking Regulation Act, 1949: 
  • Section 21A - Restrictions on Court Powers: 
    • Explicitly bars courts from reopening banking transactions on grounds of excessive interest rates. 
    • Creates a statutory prohibition against judicial intervention in interest rate matters. 
    • Protects banks' contractual freedom to set interest rates within RBI guidelines. 
  • Section 35A - RBI's Powers: 
    • Grants RBI the authority to issue binding directions to banking companies. 
    • Establishes RBI as the primary regulator for banking practices. 
    • Gives RBI exclusive jurisdiction over interest rate regulation. 
    • Empowers RBI to supervise and control banking operations. 
• RBI Directives (May 2007): 
  • First Directive:  
    • It acknowledged that interest rates have been deregulated. 
    • Recognized that rates beyond certain levels may be considered usurious. 
    • Required banks to ensure rates align with normal banking practices. 
  • Second Directive:  
    • Mandated banks to establish internal principles for interest rates. 
    • Required procedures to prevent usurious interest charges. 
    • Called for reasonable processing and other charges on loans. 
• Legal Precedent: Central Bank of India v. Ravindra and Ors.(2001): 
  • Established that RBI's power under Sections 21 and 35A includes:  
    • Duty to act through issuing directives. 
    • Authority to regulate interest capitalization. 
    • Power to exclude excessive interest from capital sum. 
    • Ability to determine treatment of interest charges. 
• Consumer Protection Act, 2019: 
  • Replaced the 1986 Act. 
  • Maintains similar provisions regarding services. 
  • Updates consumer protection framework while preserving RBI's regulatory authority 

Conclusion 

The Supreme Court's verdict marks a crucial shift in how credit card interest rates will be regulated in India. While it may appear to favor banking institutions, the ruling essentially reinforces the RBI's role as the primary guardian of financial stability and consumer interests in the banking sector. However, this decision also places greater responsibility on consumers to be more vigilant about credit card terms and conditions, while simultaneously challenging the RBI to ensure its regulatory framework adequately protects consumer interests without stifling market dynamics.