Contract-Abiding Credit Cards & Usurious Consumers

The Posh China Shop Of Credit Cards

In Hong Kong Shanghai Banking Corporation v Awaz^[1] the Supreme Court set aside an order of the National Consumer Dispute Resolution Commission (NCDRC). In its order the NCDRC held that “charging of interest rates in excess of 30% p.a. (and above) from the credit card holders by banks for the former's failure to make full payment on the due date or paying the minimum amount due, is an unfair trade practice.” Parenthesis mine.

The Court sharply criticised the NCDRC overreaching its jurisdiction by attempting to question the RBIs regulatory framework especially on matters like interest rate sealings which was excluded from Judicial scrutiny under Section 21A of the Banking Regulation Act^[2]. This provision, introduced in 1964, overrides the Usurious Loans Act of 1918 and other state-level indebtedness laws, though one wonders how it could prevail over a later special law enacted by the Parliament. The Court held that the credit card terms mutually agreed upon cannot be judicially rewritten, even if it is deemed harsh on its standards.

It is indeed strange that the Court interfered with the order of the National Commission under the Consumer Protection Act, 1986 (replaced by the Consumer Protection Act, 2019) which was a later enactment for the protection of the rights of the consumers as being overridden by the provisions of the Banking Regulation Act, 1949 (a pre-constitutional enactment) aimed at regulating banking institutions and practice. The Court held that it was only the RBI which is the prime regulator that had the power to regulate the banks, and NCDRC did not have jurisdiction to decide upon the fairness of interest rates and such financial matters.

The Court observed that “The credit card holders in the present case are well-informed and educated^[3] and had agreed to be bound by the express stipulation by the terms issued by the respective banks.” One wonders how the Court came to such a quick factual assumption. There are several studies on Credit Card Literacy (CCL) and Credit Card User Behaviour (CCUB) which the court did not care to examine^[4]. One study found CCL to be only 34% in India and that the results of logistic regression show that CCL and demographic factors influence the CCUB^[5].

Even lawyers have trouble reading and understanding the fine print in Terms & Conditions frequently revised and despatched through email or other media, but the Court concluded: “The Banks have provided all necessary information with regard to fees, and charges applicable to credit cards, credit and cash withdrawal limits. We are of the considered opinion that once the terms of the credit card operations were known to the complainants and disclosed by the banking institutions before the issuance of the credit cards, the National Commission could not have scrutinized the terms or conditions, including the rate of interest.”

In fact, the NCDRC had while appointing Ms. Indu Malhotra, Senior Counsel (as she then was in 2007) as Amicus Curiae observed: “It appears that consumers are left at the mercy of exploiters. Considering the fact that there is apparent exploitation by the NBFCs and also by certain Banks by charging interest, which may be termed as Shylockian interest or usury practice, the matter requires serious consideration as consumers in this country are required to be fully protected against such unfair trade practices as per the provisions of the Consumer Protection Act.”

The learned amicus curiae produced various circulars issued by the RBI while exercising powers under Section 45L of the Reserve Bank of India Act, providing that usurious rate of interest cannot be charged. besides the Policy Statement of RBI for the year 2007-08, leading the NCDRC to observe as follows: “…. From the various circulars issued by the RBI, it appears that the RBI repeatedly emphasized that usurious rates of interest cannot be charged by the banks but it appears that there is no control on this issue and the banks/non-banking financial institutions are exploiting the situation and the concerned officers of RBI appear to be unaware of the same…. We would add that under the Consumer Protection Act, charging of such rates of interest would amount to exploitation of the borrowers needs and to a large extent amount to unfair trade practice.”

Do Chains Of Law Fetter The Regulator?

Important questions arise:

Is the Commission bound by the Contract between the parties, when the jurisdictional concepts of deficiency in service, defect in goods and unfair trade practice are themselves unbound from contract?

Is the Commission, a judicial body required to submit and yield to the 'financial wisdom' of an executive regulatory body like the RBI?

Does not a later enactment like the Consumer Protection Act, 1986 prevail over an earlier enactment like the Banking Regulation Act, 1969, as amended in 1984?

Should the Commission, which is legally tasked with protecting consumer rights, yield its mandate to regulators like the RBI that oversee specific economic sectors?

Many industries have sectoral regulators, including Aviation, Oil & Gas, Food, Drugs etc. Is the jurisdiction of the Consumer Commissions over such industries circumscribed by the actions and regulations issued by such sectoral regulators?

Garden Of Contract & Economic Policy

Extolling the sanctity of contracts, the Court opined: “Therefore, when a person signs a document which contains certain contractual terms, that normally parties are bound by such contract; it is for the parties to establish an exception in a suit. When a party to the contract disputes the binding nature of the signed document, it is for him to prove the terms, in the contract, or circumstances in which he came to sign the documents, need to be established. Hence, the National Commission had no jurisdiction to re-write the said terms of the contract entered.”

The Court referred to the question of purported absence of judicial review of directions, within the specific domain of an expert body in the case of Shri Sitaram Sugar Company Ltd. Vs Union of India^[6] and observed as under:

“Judicial review is not concerned with matters of economic policy. The Court does not substitute its judgement for that of the legislature or its agents as to matters within its province of either. The Court does not supplant the feel of expert by its own views. When the legislature acts, within the sphere of its authority and delegates power to an agent, it may empower the agent to make findings of fact which are conclusive provided such findings satisfy the test of reasonableness. In all such cases, judicial inquiry is confined to the question whether the findings of fact, are reasonably based on evidence and whether such findings are consistent with the laws of the land.” ^[7] (Emphasis mine).

But the Court was dealing with judicial review of Writ Courts, not of specialised Tribunals whose power was crafted by a statute like the Consumer Protection Act.

Five Issues were formulated by the Supreme Court, which were answered as follows:

(i) Whether the Respondent organization has the locus to approach the National Commission?

No. The provisions of Order 8 Rule 1 CPC has not been complied with. And a Trust not being a person in the eye of law cannot be a consumer.

(ii) Whether the National Consumer Disputes Redressal Commission, has the jurisdiction to interfere with banking operations, which is the exclusive statutory domain of the Reserve Bank of India?

(iii) Whether the National Consumer Disputes Redressal Commission had the jurisdiction to fix a maximum ceiling rate of interest to be charged by banks from their credit card holders for their failure to make full payment on the due date, at the behest of the Reserve Bank of India & unilaterally direct banks/non-banking financial institutions to charge rates of interest not beyond the 30% p.a., in absence of an instruction/directive of the Reserve Bank of India?

“The Reserve Bank of India is the prime banking institution of the country, and a statutory authority entrusted with the supervisory role over banking and conferred with the authority of issuing binding directions, having statutory force13. No other entity or banking institution has been conferred by the legislature, the power of subordinate legislation to formulate and enact new directives/guidelines in public interest and for the growth of the Indian economy…

In this sphere, the only function of the Courts is to examine that the lawful authority is not abused, and not to appropriate itself the task entrusted to that authority. However, the National Commission has done just that…”

Bull in the China Shop & honourable bankers

The Court further chastised the National Commission for assuming jurisdiction and expertise over the Reserve Bank of India, in concluding that a ceiling on the rates of interest, is the purported solution to the alleged exploitation of credit card holders, contrary to the legislative intent of Section 21A of the Banking Regulation Act, 1949 that provides for a statutory bar on any court/tribunal to interfere with interest charged by banks on the premise that it is excessive.

(iv) Whether the Impugned Judgment interferes with the contract executed between the parties?

(v) Whether charging rate of interests by banks in the manner as advised by Reserve Bank of India vide its master circulars & notifications being independent of a standard ceiling rate prescribed by the Reserve Bank of India, constitute an unfair trade practice?

The Court held that “It is a well-settled principle that the terms of a contract executed between two parties, are not open to judicial scrutiny unless the same is arbitrary, discriminatory, mala fide or actuated by bias. The courts cannot strike down the terms of a contract, because it feels that some other terms would have been fair, wiser or logical. banks…. The banks in the most important terms and conditions, as provided by the Banks have provided all necessary information with regard to

fees, and charges applicable to credit cards, credit and cash withdrawal limits. We are of the considered opinion that once the terms of the credit card operations were known to the complainants and disclosed by the banking institutions before the issuance of the credit cards, the National Commission could not have scrutinized the terms or conditions, including the rate of interest. More-so, the Respondent has not approached the statutory authority, the Reserve Bank of India, for any objection against the rate of interest, or the high Benchmark Prime Lending Rate.”

The Court observed: “When a party to the contract disputes the binding nature of the signed document, it is for him to prove the terms, in the contract, or circumstances in which he came to sign the documents, need to be established.” And held the NCDRC had no jurisdiction to re-write the said terms of the contract entered between the banks and the credit cardholders, which the parties have mutually agreed to be bound by.

The Court eventually acknowledges that “It is correct to say that the National Commission has been duly empowered under the statute to set aside unfair contracts, which may symbolise a single will or are unilaterally dominant or incorporate terms which are unfair and unconscionable. However, the rate of interest, charged by the banks, determined by the financial wisdom & directives issued by the Reserve Bank of India, and is duly communicated to the credit card holders from time to time, cannot be in any manner unconscionable or unilateral. The credit card holders are duly educated and made aware of their privileges and obligations, including timely payment & levying of penalty on delay.” According to the Court there was no deception and everything was upfront – so there is no unfair trade practice.

Witless Commission & Sacrosanct Contracts

The Court seemed totally oblivious to the mandate and jurisdiction of the Consumer Commissions under the Consumer Protection Act – in most cases the Commissions are dealing with contracts between parties, express or implied and if they find that there was any “unfair trade practice” they have not only the jurisdiction, but also the implied judicial duty to declare such contracts as invalid and grant relief. In fact, Consumer Protection Act has constituted special Tribunals with special powers, beyond those conferred on civil courts, which are bound by contract. Recognising the asymmetry of power between businessmen and corporations on the one hand, and ordinary consumers on the other hand, the Tribunals are empowered to grant relief when they find defect in goods, deficiency in service or any unfair trade practice, de hors the contract or any warranty between the parties. One may note that purchases for commercial purposes are outside the purview of the protection of the Act.

The Supreme Court's analysis suggests that the Court was referring to the power of civil courts which were ordinarily bound by contracts (and had no power to rewrite contracts) and relied on limitations on the power of judicial review of High Courts over statutory bodies. The Consumer Commissions do have wider powers under the statute than mere power of judicial review. Many industries have statutory regulatory bodies^[8], including Oil & Gas, Power, Drugs and Food; that does not give them a licence to commit unfair trade practices, and contend that as long as the Regulatory body does not rein them in, they are free to raid the consumers, on the premise that they have entered into a free contract.

Several Judgments of the Supreme Court^[9] have elaborated on the powers of the Consumer Commissions to go beyond contracts. Neither the concept of deficiency in service, or defect in goods, or unfair trade practice which clothe the Commissions with jurisdiction are contract or warranty-bound. In Ireo Grace Realtech v Abhishek Khanna^[10] the Supreme Court pointed out that the Law Commission of India in its 199th Report, addressed the issue of Unfair (Procedural & Substantive) Terms in Contract. The Law Commission inter alia recommended that a legislation be enacted to counter such unfair terms in contracts. In the draft legislation provided in the Report, it was stated that: “… a contract or a term thereof is substantively unfair if such contract or the term thereof is in itself harsh, oppressive or unconscionable to one of the parties. A term of a contract will not be final and binding if it is shown that the flat purchasers had no option but to sign on the dotted line, on a contract framed by the builder.” (Emphasis mine)”. But the Court chose to ignore these pronouncements.

The Court went on to hold: “We are of the view that the incorporation of such one-sided and unreasonable clauses in the Apartment Buyer's Agreement constitutes an unfair trade practice under Section 2(1)(r) of the Consumer Protection Act. Even under the 1986 Act, the powers of the consumer fora were in no manner constrained to declare a contractual term as unfair or one-sided as an incident of the power to discontinue unfair or restrictive trade practices. An unfair contract. has been defined under the 2019 Act, and powers have been conferred on the State Consumer Fora and the National Commission to declare contractual terms which are unfair, as null and void. This is a statutory recognition of a power which was implicit under the 1986 Act.^[11]”

Long Arm Of Law Daren't Reach The RBI

The Reserve Bank was originally constituted in 1934^[12] to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability and generally to operate the currency and credit system of the country to its advantage” In 2016 the preamble was amended to further clarify that the RBI was required to frame and operate a modern monetary policy framework to meet the challenge of an increasingly complex economy, and to maintain price stability while keeping in mind the objective of growth. The Consumer Protection Act on the other hand was enacted to protect the interests of consumers and to establish authorities for timely and effective administration and settlement of consumers' disputes.^[13]

The Court was harsh in its criticism: “The National Commission has gone one step further, and while treading this unknown path has made casual passing remarks on the conduct of functions by the Reserve Bank of India, stating that “unfortunately, in our country, the regulator who is empowered under section 35A of the Banking Regulation has left it to absolute discretion of the banks”. We do not subscribe to the observation made by the Commission or the manner in which it has been made.” It is surprising that the Court observed that the RBI was such a lofty body, which were out of reach for the lowly hands of judicial authorities. Apparently, the long arm of law, is not to reach out for the supreme financial regulator.

The Court went on to hold that “an endeavour to cap the rate of interest charged by banks and dictating the need for a Benchmark Prime Lending Rate, drawing parallels with other economies across the world, whilst failing to trust the prudence of the Reserve Bank of India which has been entrusted with the fundamental responsibility of regulation of the monetary system and banking business is unwarranted.” The Court equated a regulator with a judicial body like the NCDRC (presided over by a retired judge of the Supreme Court) and chastises the judicial body for failing to have trust in the regulatory body's inaction. That apart the Court failed to consider that the mandate of the RBI and that of the NCDRC were entirely different, and a statutory expert regulator need not be blindly trusted by a judicial body under the Constitutional scheme. This is a modern-day transformation of the rule of Banker's prudence whereby wisdom of the Banking Regulator vasectomises the authority of judicial bodies.

Judicial Breach Of Trust & Laissez Faire Constitutionalism:

When mandates of the two bodies are different and the nature of the two are different (particularly when the second is an adjudicatory body), it is a constitutional travesty to hold that the lack of trust in the statutory regulatory body vitiates the order of the adjudicating body.

A healthy scepticism is a virtue in the case of a judicial body, which cannot operate on trust in a constitutional democracy. The pursuit of justice is not an exercise of trust. Justice Krishna Iyer's words speaking for the Supreme Court are a reminder:

“…any authority in our system, is bound by the rule of law and cannot be a law unto itself. To respect in authority is not to worship it unquestioningly since the bhakti cult is inept in the critical field of law…. the views of … experts are entitled to great consideration but not to exclusive wisdom.”^[14] This applies with equal, if not greater force to commercial and regulatory bodies as well.

It is disturbing that the Indian judiciary is entering a phase of laissez faire constitutionalism whereby executive bodies, including Regulators and even private bodies are deemed to hold wisdom^[15] beyond the access and reach of courts. There is also an unfortunate conflation of the limitations of judicial review of writ courts with the (perceived) limitations of the reach of statutory bodies invested with wider powers. In a world dictated by fluid finance, where buoyancy of finance capital enables non-productive rent-seeking bankers and their elite constituents to skim the cream, it is indeed disturbing that the judiciary too is yielding ground, abandoning common consumers adrift to the 19^th century ideal of the so-called 'freedom of contract”.

Author is a Senior Advocate, Supreme Court of India. Views Are Personal.

1. 20.12.2024 ↑

2. 21A. Rates of interest charged by banking companies not to be subject to scrutiny by Courts.

   Notwithstanding anything contained in the Usurious Loans Act, 1918 (10 of 1918), or any other law relating to indebtedness in force in any State, a transaction between a banking company and its debtor shall not be re-opened by any Court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive. ↑

3. The Court did not cite any study but seems to have taken judicial notice of vague anecdotal material. ↑

4. https://www.researchgate.net/publication/382927784_CUSTOMER_AWARENESS_ABOUT_THE_CREDIT_CARD_USAGE_AND_SATISFACTION_WITH_SPECIAL_REFERENCE_TO_CHENNAI_METROPOLITAN 70% of the Respondents who were Credit Card Users (CCUs) were undergraduates and below, while 27% had incomes below Rs.20,000. ↑

5. https://www.researchgate.net/publication/338629045_A_STUDY_ON_LITERACY_AND_USAGE_BEHAVIOUR_OF_CREDIT_CARDS_USERS_IN_INDIA , Mohammad Ahmar, 2020 ↑

6. [1990] 1 SCR 909 ↑

7. [1990] 3 SCC 223 ↑

8. Key sectors with regulatory oversight include finance (banking, insurance, securities), healthcare (pharmaceuticals, medical devices, healthcare providers), energy (electricity, oil and gas), telecommunications, and food and beverage. ↑

9. see Pioneer Urban Land & Infrastructure vs Govindan Raghavan, AIR 2019 SC 1779 &

   Ireo Grace Realtech v Abhishek Khanna ↑

10. AIR 2021 SC 437 ↑

11. Ibid ↑

12. Preamble to RBI Act, 1934:

    “WHEREAS it is expedient to constitute a Reserve Bank for India to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage;

    AND WHEREAS it is essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy;

    AND WHEREAS the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth;

    AND WHEREAS the monetary policy framework in India shall be operated by the Reserve Bank of India;] …” ↑

13. An Act to provide for protection of the interests of consumers and for the said purpose, to establish authorities for timely and effective administration and settlement of consumers' disputes and for matters connected therewith or incidental thereto. ↑

14. AIR 1980 SC 2141 ↑

15. Witness for example the excessive judicial deference shown to the so-called “commercial wisdom” of the CoC under the IBC, in several cases including CoC of Essar Steel v. Satish Kumar Gupta, (2020) 8 SCC 531. ↑