Monday, May 11, 2009


US President Barack Obama is pushing for a legislation to control the unfair rate hikes and penalties levied by the credit card companies in US. As of now, the biggest complaint against credit card companies is that they rip off customers at will and there are far too many hidden charges in a credit card. The same is also true in India. Here too the credit cards companies have been charging interest rates as per their own whims and fancy. There is no benchmark and the rates charged on credit cards can vary from 36% to 45% pa. These are atrociously high interest rates.Worse is that the credit card companies reserve the right of increasing the interest rate at any time with them. Also there is no uniformity in the penalties like late fees , cheque bounce charges etc that are charged to a credit card user. To top it all , there are issues of sales malpractices being used by company representatives to push card sales which ultimately harms the user financially.
So, India too needs to take a cue from Mr Obama and push for greater clarity and uniformity in credit card industry in India. The RBI in India did try to restrict the maximum interest rate that banks can charge on the credit cards , but , the same is yet to be implemented as Banks association are against it. There are quite a few issues in the way credit card companies work and needs to be corrected. Lets look at some of the major problems facing the credit card customers and the possible solutions to it.
1.No uniformity and ceiling in the interest rates charged - As of now, there is no maximum limit on the interest rate that a bank can charge on the credit cards. Also the rates vary a great deal between banks . The interest rates on credit cards can vary from 35% p.a. to 50% p.a.
Solution - The RBI/government needs to fix a ceiling on the maximum interest rate, that credit cards can charge to their customers. This was done by RBI but the Banks Association went to court against it. Also the banks need to charge similar rates to all the credit card customers. Any differential pricing must be based on customer's credit worthiness only . For example, banks ,may charge higher rate to a person having lower credit score than a person having higher credit score. But, this must also be told to the customer so that they know why they are charged the rate that they are on their cards.
2. Banks can change the interest rate at any point in time - The banks reserve the right to change the interest rate at any point in time without giving any notice to the customer. So effectively, banks can increase the interest rates whenever they want without really bothering to inform the customer.This is case of high handedness on the part of banks and must be done away with.
Solution- The banks must be forced to inform the customer about any change in the credit terms before implementing it. Also they must give notice period of at least 30 days before they implement this. This will ensure that those who don't agree with changed credit terms have an option to pay off the outstanding balance and exit out of the credit card by surrendering it.
3.Uniformity in the penalties imposed - Credit card issuers charge penalties like late payment fee, cheque dishonour fee etc to the customer. These charges are necessary to ensure that customers behave rationally, but, the charges need to have some sort of uniformity between the various credit card issuers. As of now there is great deal of variation in these charges charged by banks.
Solution - RBI can mandate minimum and maximum limit on each of these charges so as to protect the customers from being fleeced by the banks.

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