Date:08/04/2005 URL: http://www.thehindubusinessline.com/2005/04/08/stories/2005040802630900.htm
Back Plastic rules: Light at the end of tunnel?

Rajeev D. Mathur

THE Reserve Bank of India (RBI) asking the Indian Banks Association (IBA) to evolve a code of conduct for issuing credit cards and the setting up of a working group for evolving a regulatory mechanism for credit cards is welcome.

It will certainly bring cheer to the likes of Rajendra Mansinghka of Kolkata, who has been fighting for justice against what he calls harassment by the credit card division of a bank. It is also a shot-in-the-arm for consumers and organisations across the country that have repeatedly knocked on the doors of the RBI and IBA to bring in regulation in this area.

Trends around the globe indicate that a strong regulatory mechanism is the only way to control the growing credit card menace. Therefore, the RBI's reference to IBA to evolve a code of conduct to be adopted voluntarily by banks may fall short of not only the need but also the expectations of consumers. On the contrary, the setting up of a working group in order to encourage growth in a secure and efficient manner is more likely to have the desired impact.

However, it is necessary that the working group consist of professionals who are thorough in the subject and that it is transparent enough to accommodate the views of the stakeholders. Their terms of reference should relate to consumer credit, as a whole.

The issue of consumer credit begins with the current economic environment — supply side pressure of credit card issuers facing stiff competition and resorting to desperate and unfair practices on the one hand, and consumers facing financial stringency in difficult times on the other.

In recent times, attitudes to credit and economic conditions have changed with the result that credit transactions — and levels of personal debt — have risen markedly. In this environment, there is an essential need for a robust regulatory framework to govern lending transactions. Sound credit card regulation has proved very difficult to design, but fortunately, there are many lessons that we can learn from efforts of other countries.

The US's Truth In Lending Act (TILA), which was conceived in 1960 includes credit card billing and its basic features are:

  • applying to virtually all forms of borrowing for consumer purposes;

  • placing detailed disclosure obligations upon lenders;

  • standardising method of calculating and disclosing charges; and

  • prescribing specific penalties against lenders, recoverable by consumers for breaches of the legislation.

    The working group would need to look at some major concerns and recommend suitable regulatory measures from such precedents and tailor them to suit Indian needs.

    Usurious interest rates and charges

    The interest rate on outstanding credit is a startling 2-2.5 per cent per month, which works out to a whopping 30-36 per cent annually (compounded) and is amongst the highest in the world. Add to this other charges such as transaction fees, membership fees, annual charges and late payment fee and you have a delinquency rate around 10-11 per cent per annum on hand.

    Regulators in Thailand have put a cap of 18 per cent and laid down minimum salary requirements for issuing of credit cards. In Hong Kong, a court ruling has specified that charges must be reasonable and steps are afoot to force banks to use a common formula to disclose the `true' cost of credit card borrowing.

    All banks are governed by prudential norms for asset classification and income recognition. `Income' (interest income) can be `recognised' (carried to the revenue) only when it has been `earned' (paid for by the borrower). However, credit card issuers, through their annual percentage rate (APR), appear to be violating this. Australia and Malaysia have found that APR has not translated into something useful for consumers and have taken it out of their consumer credit laws.

    Unconscionable conduct

    Some credit card issuers feel that they are not obliged to share detailed terms and conditions to applicants upfront, as they are not at that point considered as `customers.' Even if they do provide, it is in fineprint and not comprehensible to a layman.

    Hong Kong and China have made it mandatory that all charges must be reasonable and the card issuers have to draw customers' attention to the terms and conditions especially those that impose significant liabilities on them.

    These countries have also come out with a regulation of debt collection practices holding recovery abuses as a criminal offence. Some other similar measures include greater consumer access to legal remedies by providing financial and legal support, etc.

    The working group would do well to recognise that pressure groups are a part of the political and institutional environment — banks have more influence than consumers. The regulations should therefore basically build around:

  • Efficient functioning consumer credit markets. Consumer credit regulation is necessary to deal with failures in credit market, in particular information failures.

  • Improved information, about cost and terms of credit, which should be available to consumers to facilitate informed choices.

  • Prevention of oppressive conduct by lenders and of over-indebtedness

  • Simplification of civil remedies — providing for public third party enforcement.

    (The author is Director of CUTS International, a research and advocacy group and can be reached at cuts@cuts-international.org.)

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