Your credit card defaults may pinch much more

 Mumbai: The next time you miss credit card payments, you may be hit by much higher interest charges and late fees then what you may be paying now.In a move that will give lenders more freedom to set their own interest rates for credit card defaults, the Supreme Court has set aside an order of the National Consumer Disputes Redressal Commission (NCDRC) which barred banks from charging more than 30 per cent interest on credit card dues.

The Supreme Court on Friday said that a policy decision pertaining to the rate of interest, and trade practices carried out by the banksacross the country, is a regulatory function within the specific statutory domain of the Reserve Bank of India and cannot come under the purview of the judicial scrutiny by the National Consumer Disputes Redressal Commission (NCDRC).

As a result of the Supreme Court's decision, banks are now free to impose higher penalty rates on overdue credit card payments, with rates potentially reaching as high as 49 per cent.

Gaurav Wadhwani, co-founder and mentor at Credit Triangle (a credit advisory firm), “The judgement is favourable to banks as it allows them to structure interest rates more freely around credit profiles and customer delinquencies. For the credit card users who don’t default, it doesn’t matter to them at all. For those who default and don’t pay back in time now have to be very careful as they will have to pay heavy fines and charges. The card holders should pay back in time as it helps them not to pay heavy fines and also keeps their credit history clean which is the most important thing one should bear in mind.”

The case was first brought about by a petition in 2008 from Awaz Foundation, an NGO that had questioned if charging interest rates between 36-49 per cent per annum on credit card dues was exploitative or usurious. The NCDRC had slammed such exorbitant rates as excessive and said they unfairly burdened customers, particularly those already in financial distress. The commission also slammed the Reserve Bank of India stating that the central bank's failure to define a "usurious" interest rate had enabled financial institutions to exploit borrowers.

The banks on the other hand argued that capping interest rates would hurt their profitability, impact credit availability. While the central bank has directed financial institutions not to charge “excessive” interest rates, it refrains from setting strict caps. Several lenders including Standard Chartered Bank, Citibank, American Express, and Hong Kong and Shanghai Banking Corporation (HSBC) had filed petitions before a Supreme Court bench of Justices Bela Trivedi and Satish Chandra Sharma.