RBI fails to stop Credit Card woes

Chains on credit card thugs
- RBI prohibits strongarm tactics to recover dues
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Mumbai, June 28: Credit card companies are being reined in.

The Reserve Bank has ordered them to stop sending out an intimidating army of goons to recover dues from defaulters.

The banking regulator has come out with draft guidelines that lay down rules of conduct for credit card issuers to bring about a modicum of civility in the way they deal with errant customers.

Credit card issuers resort to the practice of sending out thugs to stem payment defaults that some estimates put at 9 per cent of the industry’s overall outstanding credit.

The RBI today unveiled draft guidelines that seek to stop banks and non-banking finance companies (NBFCs) issuing credit cards from “resorting to intimidation or harassment of any kind either verbal or physical against any person in their debt collection efforts”.

Banks, NBFCs or their agents will also be barred from putting through threatening and anonymous calls or making false and misleading representations.

They also have been told not to indulge in acts intended to humiliate publicly or intrude on the privacy of the credit card holders’ family members and friends.

Though the RBI did not state the penalty that will be imposed on banks or NBFCs in the event of this guideline being violated, it is still considered a major relief to credit card holders who have often complained of the strongarm methods used by banks to recover dues.

There are now 12 million credit card holders with an annual average of spending per card of below Rs 50,000.

The guidelines also seek to stamp out the practice of credit card companies sending out unsolicited cards to customers and then billing them for it after activation without the consent of the recipient.

The guidelines said the credit card company will “not only reverse the charges forthwith, but also pay a penalty without demur to the recipient amounting to twice the value of the charges reversed”.

Further, the card issuing bank or NBFC has also been told not to unilaterally upgrade credit cards and enhance credit limits. “Prior consent of the borrower should invariably be taken whenever there are any changes in terms and conditions,” the RBI said.

It also directed the card issuers to be more transparent in their dealings. They have been directed to quote the annual interest rate — called in trade jargon annualised percentage rate (APR) — card products separately for retail purchase and for cash advances, if different. Moreover, the method of calculation of APR should be given with a couple of examples for better comprehension.

The RBI also said late payment charges, including the method of calculation of such charges and number of days, should be prominently indicated.

Banks have been told not to reveal any information relating to customers obtained at the time of issuing the credit card to any other person or organisation without obtaining the customer’s consent. Reacting to the guidelines, an official of a credit card issuing foreign bank said a customer is categorised as a defaulter only if he has failed to pay his dues (minimum plus late and other finance charges) for six months. It is only after this that the task of recovery is entrusted to an agent. “The default rate in the credit card industry is very low. Given this, the instances of strongarm tactics or rude behaviour are very few,” he said. According to him, the trend of banks appointing recovery agents started from the absence of data about customers’ credit records. This problem has been largely solved with the launch of Credit Information Bureau India Ltd (Cibil) which is collating the credit history of 45 million customers of banks and credit card institutions.

Card issuers do not use such heavy-handed measures to recover dues in the West because of an integrated financial system that maintains the repayment histories of all customers. The system forces customers to repay else they are in danger of being denied credit in a plastic-dominated economy.

In India, such a system doesn’t exist. The problem is compounded by the fact that debt recovery proceedings in courts are extremely tardy.Cibil has been launched for banks, financial institutions and other financiers to share retail and commercial customer information.