Painful credit

M.A. SRIRAM

A CREDIT card, named after the small plastic card issued by a bank or a non-banking financial company (NBFC), enables its holder to buy goods and services based on the holders promise to pay for those goods and services. In this system, the issuer of the card grants a line of credit to the user from which the user borrows money to pay to the vendor, and thus it becomes cash advance to the user. Normally, the purchases made by the cardholder are to be paid in full each month. The card issuers usually waive interest if the balance is paid in full each month.

There is also a debit card system, which allows immediate withdrawal of funds by an electronic cheque directly from either the bank account or from the remaining balance in the card. The debit card is not popular in India as the merchant is charged for each transaction. The debit card is used mostly for ATM (automated teller machine) transactions.

It may appear that a credit card is a convenient instrument to go shopping as, under the buy now, pay later system, the cardholder is able to buy things at random without immediate payment in cash. The crunch comes when the accumulated expenditures are not paid in full by the appointed time. Banks are lenient in allowing later payment as the accumulated interest swells up by leaps and bounds. Though banks are allowed to charge an interest of 2.5 per cent, it has been found that currently banks charge the credit card holder interest far in excess, to the extent of 50 per cent, on defaulted payments. Some of the banks were found to attend at a later date to cheques deposited in time so that they were treated as default payments coming under the mischief of heavy interest charges.

There have been innumerable complaints of fraudulent means adopted in collecting heavy interest amounts from cardholders. In a case in July 2008, the National Consumer Disputes Redressal Commission (NCDRC) ruled that charging of interest at rates in excess of 30 per cent per annum was an unfair trade practice.

The NCDRC took notice of the fact that Indian credit-card-holders pay some of the highest interest rates in the world, whereas their American counterparts pay about 13 per cent only. It added: The default rates in mature markets like the United States are very low, still it does not fully explain the high rates charged in India.

Holding the Reserve Bank of India (RBI) responsible for the current state of affairs, the NCDRC said: If the RBI is considered to be one of the watchdogs of finance and economy of the nation and the prevailing credit conditions are such as should invite its policy intervention, then, in our view, there is no justifiable ground for not controlling the banks which exploit the borrowers by charging exorbitant rates.

About the exorbitant rate of interest put on the credit-card-holders in India, there was a news item in July 2007 in the International Herald Tribune stating: Rates and fees frustrate credit card users around the world, but Indian consumers have something special to complain about: interest rates average more than 30 per cent, and can soar to more than 50 per cent, while charges tacked on for late payments are sometimes a whopping 20 per cent of the overall balance.

All credit card issuers should be transparent in informing every cardholder whether the interest levied is compound or simple interest and also whether the collection of interest is quarterly, half yearly or annual. All this information should be given to clients when they apply for credit cards. Any change in the procedure should be implemented only after intimation in advance to and due acceptance by the respective cardholders.

Banks should adopt fair means in the matter of recovery of dues. Sometimes the agents sent by banks are reported to have behaved in a brutal fashion, hurting and humiliating clients physically and verbally. Agents should be provided with proper certificates from banks, and the name and address of the designated officer who is responsible for whatever is done on behalf of the bank concerned.

Moreover, there are innumerable unsolicited phone calls for marketing the cards haunting citizens with or without credit cards at all times of the day. Banks should be directed not to intrude upon the time and peace of people through such irksome methods of canvassing.

It is true that the RBI has issued several directives/circulars to banks for implementing regulatory measures to encourage the growth of credit cards in a safe, secure and efficient manner and to ensure that the rules, regulations, standards and practices of the card-issuing banks are in alignment with the best customer practices.

As a Cancard Visa card holder, I find that the bank concerned with my credit card has made no efforts to comply with some of the important RBI guidelines. It seems to be the case with most of the credit card issuers in India.

For instance, the terms and conditions given by the bank to the cardholders is in very small letters, less then font size 5, which cannot be read easily without using a magnifying lens, whereas the Appendix of the RBI guidelines directs: The font size of the Most Important Terms and Conditions (MITCs) should be minimum Ariel - 12.

The RBI guidelines state: MITCs termed as standard set of conditions, as given in Appendix, should be highlighted and advertised/sent separately to the prospective customer/customer at all stages.

So far no advertisement has come in the media nor has any communication been sent to cardholders highlighting the terms and the changes, if any, in the terms. Some business centres readily inform the customer that they may charge 2 per cent on the price of goods sold on his/her credit card as the issuer of that card has no tie-up with them. So also some banks which, at the time of issuing the credit card, inform clients about the particulars of oil companies or airlines where they have or do not have tie-ups.

When I went to some oil stations and showed my Cancard, the employee there said he would issue the bill for the exact amount marked on the board.

Later, I found that the bank concerned with the card charged surcharge and the service tax on the surcharge. The explanation given by the bank was that it did not have tie-ups with oil companies as per policy matter.

In this regard, the RBI has issued the guidelines: The bank/NBFC should not levy any charge that was not explicitly indicated to the credit-card-holder at the time of issue of the card and getting his/her consent. However, this would not be applicable to charges like service taxes, etc., which may subsequently be levied by the government or any other statutory authority. Banks do not explicitly indicate to the cardholder at the time of issue of the card or at any other time about application of surcharges or service taxes on such surcharges.

It is understood that for credit cards issued by the State Bank of India (SBI), there is no surcharge in Indian Oil Corporation-run oil stations. It is strange that the bank issuing Cancard, also a public sector bank, has not made any effort to arrange a tie-up with one or other of the public sector oil companies, whereas private sector banks such as ICICI Bank and HSBC have been able to arrange tie-ups with public sector banks. These two private banks have become leaders in attracting a large number of cardholders, more than any of the pubic sector banks.

The RBI guidelines direct: While issuing cards, the terms and conditions for issue and usage of a credit card should be mentioned in clear and simple language (preferably in English, Hindi and local language) comprehensible to a card user.

This directive has not been complied with by the Cancard division of the bank concerned, for which the explanation offered by the bank is: The terms and conditions for issue and use of credit cards are being conveyed in bilingual, i.e. English and Hindi, as required under [the] official language policy of our bank.

While the RBI wants to spread the banking habit to rural areas, where more than 50 per cent of the people live, use of the local language is essential to enlighten people on the benefits of banking and to enlist more users.

One is aware of the constitutional position of the official language of the Union to be Hindi and of English to be continued in all respects for the administration of the Union even after the period of 15 years from the commencement of the Constitution. Further, the Constitution provides that regarding the official languages of a State, the legislature of a State may by law adopt one or more languages in the State as languages to be used for all or any of the purposes of the State.

It is well known that the Tamil Nadu Assembly adopted, in January 1968, Tamil and English as the official languages of the State. Language is a sensitive issue and there is no need now to raise any controversy over it.

The RBI guidelines are clear that the terms and conditions for issue and usage should be mentioned in clear and simple language (preferably in English, Hindi and local language) comprehensible to a card user.

It is a mandatory directive, which should be implemented by banks while issuing credit cards. If a bank in this instance, the bank issuing Cancard found it difficult to implement this directive on the use of local language comprehensible to the customers it should have appealed to the RBI to discard the directive or to get an exemption for itself.

Leave alone the RBI directive and the official language policy of the bank in question. How is it possible for a banking institution having branches and customers throughout India to confine its work only in English and Hindi even in non-Hindi States, where public relations have to be maintained and banking habits enlarged among the people who may not be well- versed in English or Hindi?

The Imperial Bank of India was taken over by the Government of India and renamed as State Bank of India under the State Bank of India Act, 1955. This was followed by the formation of seven banks as subsidiaries of SBI under the State Bank of India (Subsidiary Banks) Act, 1959. Fourteen major commercial banks were nationalised in 1970 and six more in 1980 by Acts of Parliament.

The statement of objectives and reasons appended to the Banking Companies (Acquisition and Transfer of Undertaking) Bill, 1969, stated: The banking system touches the lives of millions and has to be inspired by the large social purpose and has to subserve national priorities and objectives, such as rapid growth in agriculture, small industries and exports, raising of employment levels, encouragement of new entrepreneurs and the development of the backward areas. For this purpose, it is necessary for the government to take direct responsibility for the extension part of banking system.

I was in Parliament and gave full support to the nationalisation of banks on the basis of the objectives enunciated in the Bill. The main objective of the nationalisation was to transform banking for the classes to banking for the masses. If the bank, one of the nationalised banks of 1970, decides to stick to its language policy, it will defeat the very purpose of banking for the masses and will serve only the classes of people knowing English or Hindi.

The directives of the RBI cannot be ignored by any bank in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949, have given the RBI vast powers of supervision and control over commercial banks.

During the debate in the Lok Sabha on July 29, 1969, on the Bill on nationalisation of banks, a member raised a question whether nationalised banks would be outside the purview of the RBI. Prime Minister Indira Gandhi, who also held the Finance portfolio, informed the House: This is not at all true, because they remain scheduled banks and the Reserve Banks powers with regard to them also remain. This will not reduce the Reserve Bank to insignificance. In fact, it can become more significant and purposeful and the Reserve Banks organisation may have to be strengthened and given new definite directions.

The nationalisation of Indian banks in 1970 and in 1980 has imposed new responsibilities on the RBI to direct the growth of banking and credit policies towards more rapid development of the economy and the realisation of certain desired social objectives. The RBI and the Centre should take notice of the defiance of RBI directives by certain banks.

It is not known whether all banks other than the Cancard Visa card-issuing bank, and the NBFCs, have their own official language policy of English-Hindi only, in violation of the RBI directives. Public sector banks run on public money should have some consideration on the development of banking business and allow its benefits to reach the vast disadvantaged sections of the people. Nationalised banks should follow the objective of banking for the masses.

Either the RBI or the Government of India should take immediate steps to correct the unwarranted and dangerously unwise decision taken by a bank or banks in regard to defiance of certain directives of the RBI, especially in regard to the adoption of an English-and-Hindi-only policy in their banking activities. Otherwise, there may be a need to get a clear judicial decision on this or to seek other means to offset the impending danger. It should not be allowed to disturb the unity and harmony now prevailing in the multilingual federal set-up of India.

In 1920, shoppers in the U.S. introduced a plate buy now, pay later which could be used only in shops that issued it. In 1950, Diners Club and American Express issued the first plastic money cards. With magnetic strip in 1970, the credit card became part of the information and technology system.

Though there is enormous growth in the use of various types of credit cards for each kind of business and shopping at the average of four cards per user, there is growing dissatisfaction among cardholders on the painful stranglehold of the card issuers. In April 2008, Chris Dodd, chairman of the Senate Banking Committee, introduced new legislation, the Credit Card Accountability, Responsibility and Disclosure Act, to end the abusive and costly credit card practices in the U.S. The legislation has been welcomed by the coalition of consumer, labour and civil rights groups: [A]s the U.S. economy tightens, financially vulnerable families need the protection of the Credit Card Act.

India also needs a strong legislative measure to eliminate unjustified interest hikes and unfair contract clauses and to provide for severe penalty on the card issuers in levying abusive and hidden charges. Credit cards add, at the present, more discredit to the entire management of the banking structure in India.