Credit Cards: RBI's Houdini Act. (Smoke & Mirrors)

Finally, relief for credit card users

Niranjan Krishnan | July 02, 2005 14:59 IST

In a welcome move that will wipe the frown off the face of many credit card holders, the Reserve Bank of India has proposed a set of guidelines to regulate credit card operations in the country.

The draft of the guidelines is presently placed in public view for feedback from various stakeholders. They will be finalised in the next few months and come into force for implementation by the end of August.

The scope of the proposed guidelines spans a whole gamut of credit card operations, touching upon card issuance, interest assessments, billing, customer rights, information-privacy and confidentiality, debt collection practices, outsourcing activities and redressal of customer grievances.

Some of the creditable and consumer-friendly features of the proposal are:

* The terms and conditions of the credit agreement should be disclosed in clear and simple language in all important communications to the customers. A listing of key items to include in those communications is also provided in the guidelines.
* The interest calculations must be explained with illustrations in each billing statement dispatched to customers.
* The credit card companies should send their billing statements without delay and customers must be given at least 10 days for settling their bills before interest assessments can kick in.
* Personal information of customers should be held confidential and cannot be shared with third parties.
* An Internet-enabled "Do not call registry" must be maintained by credit card companies to give consumers the choice of opting out of unsolicited phone calls and SMS messages.
* Debt collectors should not resort to verbal or physical intimidation or harassment of cardholders, their friends and family.
* The credit card companies are liable for the actions of third parties hired by them for sales or collections.
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Customer complaints should be resolved within 60 days.

The RBI guidelines, though covering a lot of ground, however, are not free from their baggage of controversies, limitations and omissions.

The credit card companies are now authorised to issue the plastic to only those consumers with independent financial means. The card issuers are explicitly forbidden from signing up students into their portfolio.

Expectedly, this rule has been greeted with consternation by the industry. It will elicit a similar disapproval from the student population and is also bound to take some fun out of their ephemeral and insouciant school life.

There is a provision that implies placing credit limit restrictions on customers holding multiple credit cards. It appears a tad gratuitous, if not officious, on the part of the regulator to make such a rule or recommendation.

While it is reasonable to prohibit the issuance of credit cards to minors, criminals and anti-nationals, the right of approving otherwise bona fide customers should remain with the risk taker and not the regulator.

By the same token, the number of credit cards and total spending limit to approve or avail of, are decisions best left to card issuers and their customers.

Both these stipulations appear ill-advised and smack of over-regulation that hinders than helps the interest of card issuers and consumers. Only a fence is needed between the two parties so that they can stay within their limits and do business with each other. Not a fortification that could stifle them both.

These two controversial provisions will hopefully be modified before the guidelines are released for implementation.

Issues concerning unsolicited offers, identity theft and fraud do not appear addressed adequately by the present batch of guidelines:

* There is a ruling that states that unsolicited credit cards should not be generally issued but it stops short of prohibiting such a practice. Sending unsolicited credit cards to customers' doorsteps is an unwarranted allurement that could set them up for a debt trap. It would be expedient to tighten the rule further and strictly bar such an entrapment tactic.
* There is no mention of the liability of credit card issuers to customers in case there is leakage or loss of customer information, or theft of customer identities due to weakness in their customer information storage and processing. Fixing the liability of card issuers for customer damages stemming from internal operational failures would further reinforce the rules on information privacy and confidentiality.
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In case a credit card is lost or stolen, the customer is usually held liable for any unauthorised charges made from the time of loss to the deactivation of card by the company following customer's report. As it happens in developed countries, an upper limit needs to be placed on the extent of the customer's liability since the card issuer, too, has the responsibility of managing fraud risk by diligently scanning out-of-pattern behaviour while approving transactions at the point-of-sale.

One overarching theme that did not get sufficient attention in the guidelines is the specification of penalties for their violation. Given that grievance redressal is a tardy and, at times, tormenting process in India, especially for consumers who often lack the awareness and resources, setting a stringent minimum threshold for penalties upfront can go a long way towards motivating the card issuers in following the guidelines in their day-to-day operations.

On the other hand, the critical issue of card issuers making uninitiated and unwanted contacts with customers could possibly be resolved more efficiently than the arrangement envisioned presently.

The rules propose an internet-enabled "Do not call registry" to be maintained by each and every card issuer to give customers the choice to be excluded from solicitations.

This entails customers individually contacting every card issuer in the country, a cumbersome task given the proliferation of card issuers in the country. Also, there will be replication of efforts by card issuers whose resources could be more gainfully deployed in other value-adding activities.

A more efficient mechanism for enabling customers to opt out of solicitations would be to maintain the registry in a central location accessible to both card issuers and consumers.

Credit bureaus such as Credit Information Bureau of India Ltd. (Cibil), which maintain a record of all credit consumers, could provide a perfect platform for this purpose.

Entrusting the credit bureaus with maintaining the "Do not call registry" can also address another such "excuse me, please" issue not taken up by this initiative. Not only can customers opt out of unsolicited phone calls, they can also be given the right to make their credit file inaccessible to lenders making unsolicited offers through other channels like mass-mailing, which is another matter that would need to be addressed at some point in time.

This proposal does not also cover the issuance of credit cards to consumers because their employers require it done. This matter opens up a few grey areas where the regulatory lakshman rekhas between different parties need to be drawn, and could perhaps be a subject of the next round of regulations.

Overall, the most glaring limitation of the present set of guidelines is that they are expressly confined to credit card operations. A majority of the regulatory gaps the guidelines help in filling are also common to other credit schemes available in the market such as vehicle loans, home loans, and personal loans.

The RBI can consider broadening the scope of the guidelines to apply for all other credit products and facilities depending on the pertinence and possibility of application.

In summary, although the proposed set of RBI guidelines on credit card operations has some wrinkles to be pressed out, it will undoubtedly serve as a first solid pass of the steamroller in levelling the playing field and promoting an equitable balance between credit card issuers and their customers.