An interest rate of 30 percent or more on financial instruments may feel akin to extortion for many, particularly in a democracy where fairness is expected in financial practices. However, the Supreme Court ruled that such rates cannot be deemed unfair since they are explicitly agreed upon in contracts between banks and cardholders.
The Supreme Court bench, comprising Justices Bela M Trivedi and Satish Chandra Sharma, stated that the National Consumer Disputes Redressal Commission’s (NCDRC) earlier observations contradicted the legislative intent of the Banking Regulation Act, 1949. The Court emphasized that banks operate within the Reserve Bank of India’s (RBI) regulatory framework, and no evidence of deception or unilateral practices was presented.
Consumer contracts under scrutiny
The judgment clarified that the NCDRC lacked jurisdiction to rewrite the terms of contracts that customers willingly signed. It also reaffirmed that such contracts cannot be labelled “unfair” merely because of high interest rates. The Court observed: “The credit card holders are duly educated and made aware of their privileges and obligations, including timely payment and penalties on delay.”
While the verdict is legally robust, it underscores the moral conflict surrounding exorbitant interest rates.
RBI’s stance on interest rate practices
In April 2024, the RBI issued a directive to banks, non-banking financial companies (NBFCs), and other lenders, highlighting unfair practices in loan interest calculations. These included:
• Charging interest from the loan sanction date rather than the actual disbursement date.
• Calculating interest from the cheque issue date, even if the cheque was handed over days later.
• Charging a full month’s interest for partial-month loans.
These practices reveal systemic issues in the financial sector’s approach to interest charges. However, RBI’s oversight largely focuses on statutory loans, leaving credit card interest rates unchecked.
Who bears the burden?
India’s banking sector is weighed down by non-performing assets (NPAs), primarily stemming from unpaid corporate loans. Small borrowers, such as MSMEs and individual credit card holders, often bear the brunt of this burden. High interest rates help banks offset these losses, but disproportionately impact financially vulnerable customers.
A moral argument for reform
While the Court’s ruling is legally sound, it does little to address the moral concerns surrounding credit card interest rates. Contracts, though legally binding, often leave consumers with little negotiating power against well-resourced banks.
The RBI’s 2024 notification highlighted unfair practices in loan disbursements, which echo the issues faced by credit card users. However, until a legal challenge questions the morality of these contracts, reform remains unlikely.
A more effective approach could be a Public Interest Litigation (PIL) targeting the fairness of these contracts. The government must intervene to redraw contract terms, ensuring they are consumer-friendly and fair. Until such changes occur, the courts have limited scope to address these grievances.
As stated earlier, 30 percent and above interest rate attached to any financial instrument in a democracy in the backdrop of normal practice could be categorised at the extortion level. However, when the central government has still retained a Good and Services Tax (GST) slab of 28 percent on certain items—so-called high-end items such as luxury cars, motorcycles, consumer durables (ACs, fridges), and “sin goods” like cigarettes and aerated drinks fall in this category—this argument seems moot. Such exorbitant rates go against the grain of decent living and livelihood, but who is to argue with the authorities?
The Supreme Court’s decision reaffirms the legal authority of banks to impose high interest rates, citing contractual transparency and regulatory compliance. However, the moral question remains: should consumers, particularly those financially vulnerable, bear the brunt of exorbitant charges? Addressing these concerns will require systemic reform, proactive government action, and a renewed focus on consumer rights.