Written by Arnav Sinha and Om Chandak.

I. Introduction

The recent Supreme Court (SC) judgment overturning the National Consumer Disputes Redressal Commission’s (NCDRC) decision to impose a ceiling on credit card interest rates in case of non-payment of dues has highlighted the need for a more structured regulatory framework in India. While the Court rightly emphasized the Reserve Bank of India’s (RBI) exclusive authority over banking practices, the absence of a clear framework for determining reasonable credit card interest rates raises concerns about consumer protection and financial fairness. This article tries to explores the rationale for implementing such a measure, drawing insights from international practices and proposing a regulatory approach suited to India’s financial ecosystem.

II. Background of the Case

The NCDRC in the case of Awaz and Ors. v. RBI held that the interest rate of 36% to 49% charged by banks in case of non-payment of the due amount by the debtors is usurious and unfair. In case of default, the commission effectively set a ceiling interest rate of 30% per annum (p. a.). It determined that capitalizing penal interest and applying interest with monthly rests are also unfair trade practices. 

The Court also touched on the responsibilities of the RBI for issuing guidelines that will prohibit unfair trade practices, such as charging excessive interest rates in case of default in payment of the same. The Commission also criticized the RBI for leaving banks with discretionary power to set interest rates.    

III. Supreme Court Restores Banking Autonomy on Interest Policies, Scraps NCDRC Ceiling 

The SC has overturned the NCDRC’s decision and removed the 30% p.a. interest rate cap imposed by the NCDRC. The SC, through its order, has determined four significant points. Firstly, while deciding the NCDRC’s jurisdiction, in paragraph 51 of the order, the Court held that Section 21A of the Banking Regulation Act bars re-opening transactions between banking companies and debtors. Therefore, NCDRC does not have jurisdiction to set such a ceiling, and it violates the RBI’s jurisdiction.

Secondly, the SC clarified that the RBI’s regulatory powers stem from delegated legislation granted by the legislature, and as such, it cannot be directed or compelled by the NCDRC or any other body to enact specific laws or regulations. The Court emphasized that the NCDRC does not have the jurisdiction to require the RBI to frame interest rate laws or impose a ceiling, as this would amount to an encroachment on the RBI’s exclusive statutory authority. This aligns with the principle that delegated authorities act within the scope conferred by the legislature and are not themselves empowered to legislate independently.

Thirdly, the SC rejected the argument that the RBI Guidelines, i.e. RBI’s Master Circular on Credit Card Operations of Banks, were arbitrary or against public interest. It mandates that credit card issuers must ensure transparency in disclosing interest rates and other charges, including the Annualized Percentage Rate (APR) for various credit card transactions such as retail purchases, cash advances, and late payments. It also prohibits the compounding of interest on unpaid charges and requires clear communication of payment obligations to customers.

In paragraph 54, the SC emphasized judicial deference to the RBI as an expert regulator. The Court recognized that the RBI, exercising its statutory power, must have acted prudently in issuing the Master Circular on Credit Card Operations. Reflecting settled law, the Court refrained from scrutinizing the circular’s detailed principles, upholding it as a valid and reasonable regulatory measure within RBI’s exclusive domain.

Lastly, the court held that there is no unfair trade practice because the credit card holders are “well informed and educated” about the interest rates. There was no evidence brought on record that shows the contrary, i.e., there was misrepresentation or deception. Based on the foregoing findings, the SC invalidated the interest rate cap established by the NCDRC.

IV. Current Framework: Need for a Ceiling

Post the judgment, the framework that was the RBI’s Master Circular on Credit Card Operations of Banks, merely emphasizes the need for banks to avoid imposing excessive rates on consumers. It refrains from clarifying the meaning of “excessive rates” and the statutorily mandated or RBI-prescribed ceiling on the interest rates that the banks may charge on credit card dues. The RBI, under the current framework, functions as the regulatory authority; it delegates the responsibility of determining specific interest rates to the boards of individual banks, subject to compliance with RBI-issued guidelines.

The removal of the previously imposed ceiling comes when credit card usage and outstanding dues are witnessing unprecedented growth. As of June 2024, the total outstanding amount on credit cards surged to approximately ₹2.7 lakh crore, up from ₹2 lakh crore in March 2023. Given the rapid expansion in credit card usage and the steady rise in outstanding amounts, it is imperative to maintain a balance between consumer protection and financial stability.

However, this removal, while allowing better flexibility and potentially increasing revenue for banks, presents challenges in balancing consumer protection and financial stability. A ceiling on interest rates could serve as a form of social insurance; it can shield borrowers from excessive interest rates and protect consumers who are experiencing negative income shocks from falling into complex debt arrangements. Without such limits, low-income borrowers are especially vulnerable to predatory lending practices, where repayment obligations can lead to the risk of “persistent debt,” i.e., an arrangement under which borrowers pay more interest and fees than the principal amount. Furthermore, from a macroeconomic perspective, unchecked credit card interest rates also pose widespread systemic risks, as rising household debt levels in a country may divert resources away from essential consumption, dampening economic growth.

V. Learning from Global Practices: Crafting a Balanced Approach for India.

Internationally, concerns about unregulated credit card interest rates have led to significant legal discourse on implementing a ceiling. For instance, in the United States, where no mandatory ceiling currently exists, the very introduction of legislation in Congress on December 26, 2024, proposing limits on interest rates charged on credit card dues, reflects a growing recognition that unregulated rates can push consumers into the vicious cycle of persistent debt and create systemic financial risks. Similarly, in the United Kingdom (UK), the absence of a regulatory ceiling has allowed interest rates to rise to as much as 80% annually in some cases, disproportionately impacts low-income households who rely on credit cards to cover necessities or emergencies. In light of its rapidly growing credit card market, if India continues without a clear ceiling, it risks facing similar outcomes, i.e., high indebtedness, erosion of household savings, and a potential need for a reactive legislative intervention. Therefore, for India, adopting an appropriate ceiling on credit card interest rates is not only a protective measure for consumers but a proactive step to ensure equitable financial practices.

Across the globe, the approach to regulating credit card interest rates varies widely. On one hand, some jurisdictions have opted for statutory ceilings, embedding consumer protection directly into their legal systems. One such jurisdiction is Hong Kong, where these ceilings are mandated under the Money Lenders Ordinance, which prescribes an effective interest rate ceiling of 48% p.a., with rates exceeding 36% presumed to be extortionate unless proven otherwise by the courts. This dual-tier framework ensures stringent oversight while allowing judicial discretion in exceptional cases.

On the other hand, a few jurisdictions like the Philippines have opted for a significantly different and more flexible route. Under the Philippine Credit Card Industry Regulation Law, the Philippines has empowered its central bank, i.e., the Bangko Sentral ng Pilipinas, to determine and periodically revise interest rate ceilings. This makes the ceiling determination dynamic and based on prevailing micro and macro-economic conditions. An excellent example of this can be the change in the ceiling rate during the COVID-19 pandemic to cushion the impacts of negative income shocks on consumers facing a liquidity crisis and emergency expenses. This change in ceiling was widely recognised as a significantly advantageous move, especially for the people who had “no choice but to swap cash for credit during those challenging times”.

While the first approach provides clarity and predictability, it may lack the flexibility to address India’s growing credit card usage and rapidly changing micro and macro-economic landscape. Thus, an approach similar to the Philippines would better suit a growing country like India. This would also be more practical and easier to implement as it can be seamlessly integrated as an additional component in the monetary policy framework established under Section 45ZB of the RBI Act, 1934. Such a strategy would balance consumer protection with financial stability and ensure that regulatory measures remain pragmatic and responsive to India’s evolving financial ecosystem.

VI. Conclusion

The SC’s ruling has affirmed the RBI’s power and has dismissed the NCDRC’s power to set a cap on interest rates. The judgment highlights the dynamic role of the RBI, but at the same time also sheds light on the lacuna in framing policy from the RBI’s side. After analysing the framework of different nations, the Philippines’ framework suits the Indian condition the best. India should take lessons from the Philippines, where the central bank has set a limit and reviews the set limit periodically. This dual-tone approach, on the one hand, protects the consumer from excessive interest rates. On the other hand, it conducts periodic reviews to maintain according to the economic conditions. India should walk on the same path. Setting a cap and periodic review will safeguard borrowers and create a sustainable credit ecosystem.