No more exorbitant charges on credit cards: RBI

In May, RBI issued a circular stating that interest rates were deregulated and credit cards and personal loans, falling in the non-priority segment, could charge a higher interest rate. However, the apex bank has now noted that "rates of interest beyond a certain level may be seen to be usurious and can neither be sustainable nor be conforming to normal banking practices."

"The total cost to the borrowers, including interest and all other charges levied on a loan, should be justified having regard to the total cost incurred by a bank in extending the loan and the extent of return that could be reasonably expected from the transaction," it said.

Currently, various charges are levied by banks under different categories such as dues, late fees, cash advance fees, etc. and the charges vary from bank to bank and range from 30 percent to a whopping 51 percent.

For instance, banks earn considerable sum by charging credit card holders who avail of cash advance service anything between 26 percent to 46 percent interest on the amount withdrawn and unsuspecting credit card holders continue to be charged this hefty interest as this transaction is settled only after all other credit card purchases are settled.

Banks have often justified higher interest rate on credit card dues on the grounds that they foresee higher risk of default due to the insecure nature of transactions. The delinquency rate in India is 6 to 8 percent, bankers said.

According to C.V. Gidappa, general secretary of Credit Card Holders' Association of India (CCHAI), credit card holders in India, who pay the highest rates of interest in the world, have unsuspectingly paid over Rs.6000 crore ($1.5 billion) as "extra charges" by banks in a span of ten years.

To put an end to this unscrupulous practice of charging hefty fines and penalties on unsuspecting customers, RBI said credit card operations of banks should be made more transparent.

RBI noted that some banks send credit card statements very late, sometimes just before the due date or even at times after the due date has passed to deliberately earn extra income by charging late fees to the credit card holder. To put an end to this practice, RBI said in its circular dated July 23, "Issuer banks now have to receive customers' acknowledgment for receipt of the monthly credit card statement to ensure there is no delay in dispatching the bills and cardholders have at least a fortnight for making payment before the interest starts getting charged."

In cases where banks charge variable interest rates based on the payment history of the credit card holder, they have been asked to ensure transparency in levying such differential interest rates. In other words, the fact that higher interest rates are being charged to the credit card holder on account of his payment/default history should be made known to the credit card holder, RBI said. For this purpose, banks should publicize through their website interest rates charged to various categories of customers, it said.