India: Credit Cards Under Discredit

[Harold Schiffman]

  Credit Cards Under Discredit
Mainstream, Vol XLVII, No 16, April 4, 2009

Credit Cards Under Discredit
by Era Sezhiyan, 9 April 2009


A credit card named after the small plastic card issued 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 cards,
whether a Bank or Non-Banking Financial Company (NBFC), grants a line
of credit to the user from which the user borrows money for payment to
the vendor and thus it becomes cash advance to the user. Normally, the
purchases made by the card holder 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
the funds by an electronic check 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 transactions.

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

There have been innumerable complaints of the fraudulent means adopted
in collecting heavy interest amounts from hapless card holders. In a
case in July 2008, the National Consumer Disputes Redressal Commission
had ruled that charging of interests at rates in excess of 30 per cent
per annum is an unfair trade practice.

The Commission took notice that the Indian credit card holders pay
some of the highest interest rates in the world whereas their American
counter-parts pay about 13 per cent only. It added:

The default rates in mature markets like the US are very low, still it
does not fully explain the high rates charged in India.

Holding the Reserve Bank of India responsible for the current state of
affairs, the Commission 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 rates 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: the
interest rates average more than 30 per cent and can soar to more than
50 per cent, while charged 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 card
holder whether the interest levied is compound or simple interest and
also whether the collection of interest is quarterly, half-yearly or
annually. All these information should be given to the clients at the
time of applying for credit cards. Any change in the procedure should
be implemented only after intimation in advance to and due acceptance
by the respective card holders.

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

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

RBI Guidelines

It is true that the RBI has issued several directives/circulars to the
banks for implementing regulatory measures for encouraging growth of
credit cards in a safe, secure and efficient manner as well as to
ensure that the rules, regulations, standards and practices of the
card issuing banks are in alignment with the best customer practices.
As a VisaCancard holder, I find that the bank concerned with my credit
card has made no efforts to comply with some of the important the RBI
Guidelines. It seems to be the case with most of other credit card
issuers in India.

For instance, the terms and conditions given by the bank to the card
holder has been only in very small letters in 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 any communication
sent to the card holders to highlight the terms and the changes, if
any, in the terms.

Some business centres readily inform the customer that they may charge
two per cent on the price of the goods sold on his/her credit card as
the issuer of that card has no tie-up with them. So also some banks
are very transparent to inform the client at the time of issuing the
credit card the particulars of important oil companies or airlines
where they have or have not a tie-up. 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 over and above it the
service tax on the surcharge. The explanation given by the Bank
concerned is they “do not have tie-up 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.” The Banks do no
explicitly indicate to the card holder at the time of issue of the
card or at any other time about application of surcharges or the
service taxes on such surcharges.

It is understood that for the credit cards issued by the State Bank of
India, there is no surcharge in IOC oil stations. The Bank issuing the
VisaCancard also is a public sector Bank as the SBI. 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 like ICICI and HSBC have
been able to arrange tie-up with the public sector Banks. These two
private Banks have become leaders in attracting large number of card
holders than any of the pubic sector Bank.

Official Language Policy of the Bank

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, that is, English and Hindi, as required under
Official Language Policy of our Bank.”

While the Reserve Bank wants to spread banking habit to rural areas
where more than fifty per cent of the people of the country live,
usage of local language is highly essential in enlightening the people
on the benefits of banking and in enlisting more users of its
benefits.

We are aware of the constitutional position of the Official Language
of the Union to be Hindi and even after the period of fifteen years
from the commencement of the Constitution, English to be continued in
all respects for the administration of the Union. 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 State Assembly has adopted in
January 1968 Tamil and English as the Official Languages of the State.

The language issue is a highly 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 have been implemented by the
Bank while issuing the VisaCancard credit cards. If the Bank 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 the 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 formation of seven Banks as subsidiaries of
the SBI by the State Bank of India (Subsidiary Banks) Act 1959, 14
major commercial Banks were nationalised in 1970 and six more in 1980
by the 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
on the classes of people knowing English or Hindi. The toiling masses
of people in agriculture, small scale industries, in rural and
backward areas will not be approached by English and Hindi knowing
people only.

The directives given by 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 the
commercial Banks.

During the debate in the Lok Sabha on July 29, 1969 on consideration
of the Bill on nationalisation of Banks, a Member of Parliament raised
a question whether the nationalised Banks would be outside the purview
of the Reserve Bank of India. Prime Minister Mrs. Indira Gandhi, who
was also holding the office of Finance Minister at that time, informed
the House: “This is not at all true, because they remain scheduled
banks and the Reserve Bank’s 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 Bank’s
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 for directing the growth of banking
and credit policies toward more rapid development of economy and
realisation of certain desired social objectives. Severe notice should
be taken by the RBI and the Government on the defiance of the RBI
directives by certain Banks.

It is not known whether all Banks and Non-Banking Financial Companies
other than this VisaCancard issuing bank are also having 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 Indian people
on the whole. The 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 unwarranted adoption of 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 multi-lingual federal set-up of
India.

Need for a Law to Prohibit Unfair Credit Card Practices

In 1920, the shoppers in the USA introduced a plate —‘buy now, pay
later’—which could be used only in the 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 the card
holders on painful stranglehold of the card issuers. In April 2008,
Chris Dodd, Chairman of the Senate Banking Committee, introduced new
legislation to bring in the Credit Card Accountability,
Responsi-bility and Disclosure Act to end the abusive and costly
credit card practices in USA. The legislation has been welcomed by the
coalition of consumer, labour and civil rights groups “as the US
economy tightens, financially vulnerable families need the protection
of the Credit Card Activity”.

India also needs a strong legislative measure to eliminate unjustified
interest hikes, 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.

The author is a Senior Fellow at the Institute of Social Sciences and
a former Chairman of the Public Accounts Committee of Parliament. He
can be contacted on e-mail at: sezhiyan23 at yahoo.com
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