credit card fraud

This article has been written by Vivekanand MR pursuing a Diploma in International Contract Negotiation, Drafting and Enforcement from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

In 1950, Ralph Scheinder of New York invented the Diners Club card as a way to pay without carrying it, which is known as a modern-day credit card. Over time, the credit card industry has evolved and grown significantly. In the modern world, the use of credit cards has become so common. Credit cards are so handy that people use them for almost every type of goods and service, both domestically and internationally. Looking at the popularity and the business opportunity, every bank in India has issued its own credit card. It is pertinent to know what laws govern the issuance and operation of credit cards. In India, frameworks and rules are predominantly provided by the RBI by issuing statutory guidelines to ensure credit card operations are proper and customer friendly. Apart from RBI, there are several acts that apply to credit cards. Let us have a bird view of them. 

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Who can issue credit cards in India

In India, credit cards are issued by scheduled commercial banks (excluding payment banks), regional rural banks (in collaboration with other banks), and Urban Cooperative Banks, Non-Bank Financial Companies (subject to approval from the RBI). Prepaid cards are issued by eligible banks and authorised non-banks. Banks in India have the option to operate as a department or as a subsidiary firm. Prior approval from the RBI is not required for institutions that are willing to operate through tie-ups with card issuing banks. The banks with a net worth of Rs. 100 crore shall engage in credit card business. However, if the bank intends to establish an independent institution for credit card business, it must obtain approval from the RBI. More information on who can issue credit cards can be obtained here.

How credit card is issued

Once the application by the applicant for procuring a credit card is submitted along with enclosures, viz., copies of identity proof, address proof, PAN card, employment proof or income proof, and references given by the applicant, the bank verifies the authenticity of the documents, references and other details provided by the applicant and also checks the CIBIL score to understand creditworthiness, approves the application, and issues a credit card.

Importance of consent

As per Section 10 of the Indian Contract Act 1872, one of the terms of contact is ‘free consent’ and Section 14 of the Act defines free consent. Provisions of the act are applicable at every step of credit card operations/transaction and transactions, from procuring applications to issuing cards. Proving any facility consent of the customer should be free and explicit. 

Unsolicited cards and facilities

As per RBI guidelines, banks shall not issue any cards or facilities unsolicited by customers. The consent of the customer should be clear and explicit, not implied. In case any bank or institution issues and/ or activates any card or facilities that were not solicited by the customer, the bank or institution shall reverse the charges and be liable to pay a penalty of twice the value of the charged amount. As per the Banking Ombudsman scheme, the customer, whose unsolicited card has been issued, has the right to approach the Banking Ombudsman for compensation for the loss incurred in terms of time, money, harassment and mental torture. The card issuing bank can not hold the customer responsible for any loss arising from the misuse of such an unsolicited card.

Unsolicited commercial communication

RBI requires the banks to comply with regulations on unsolicited commercial communication issued by the Telecom Regulatory Authority of India, ‘The Telecom Commercial Communications Customer Preference Regulations, 2010. As per this TRIA regulation, no commercial communication shall be made to any customer, whether registered or unregistered, either through a call or SMS between 9 PM and 9 AM. Under this regulation, TRAI mandates that telemarketers or service providers scrub and filter the data of customers; this is to prevent unsolicited calls or SMS. RBI, in its Master Direction..dated 21-04-2022 specifies that representatives of banks or card issuers shall contact customers only between 10 am and 7pm. 

How the personal information is protected

Card issuers protect personal information by using magnetic strips, CVVs, pin number, OTPs, electronic chips and so on. Section 43A of the IT Act 2000 requires any company, firm, sole proprietorship or association of individuals who are engaged in either commercial or professional activities and are possessing, dealing with, or handling personal sensitive data or information in their computer, whether the computer is owned, controlled or operated, to protect themselves by implementing reasonable security measures, failing which such company, firm, sole proprietorship or association of individuals shall be liable to pay compensation to the person so affected. 

Credit information

In India, the four major credit bureaus are CIBIL, Experian, Equifax, and CRIF High Mark. As per Chapter II, Section 3 of the Credit Information Companies (Regulation) Act, 2005, a bureau or credit information company needs to be registered with the RBI before sharing credit. According to this section of the said Act, the credit information companies shall adopt privacy principles while collecting, processing, collating, preserving, and/or sharing the information. Under Chapter VII of the Act, offences and penalties (U/s 24), cognizance of offences is provided. Under Section 25 of the Act, the RBI reserves the right to impose penalties.

Compliance with Know Your Customer (KYC)

Guidelines issued by the RBI on February 25-2-2016 direct banks and regulated entities (RE) to comply with KYC policy, customer acceptance policy, risk management, customer identification procedure, customer due diligence (including individuals, corporations, or firms on an ongoing basis), and reporting requirements to the Financial Intelligence Unit of India. Further, banks, REs and NBFCs shall not have any accounts in the name of individuals or entities who have links with terrorists that have been approved and periodically listed by the United Nations Security Council and under Section 51A of the UAPA Act, the Central Government has rights to freeze, seize or attach such funds or financial assets held by such individuals or entities. This is to ensure the prevention of money laundering, prevention of the financing of terrorism.

How the transactions carried out through credit cards protected

Card issuer protects personal information by using magnetic strips, CVV, pin nines umber, OTP, an electronic chip so on. (IT Act 2000). (PDP bills are applicable.) The RBI has taken measures to ensure credit/debit card transactions are safe and secure. The cardholder gets SMS & email alerts and is aware of the transactions on his/her cards. The cardholder can file a complaint about any unauthorised transactions with the card issuer.

Unsecured loan

Loans under credit cards are unsecured loans. These loans fall into the high risk category as the lending bank or institution has no collateral. In the event of default, the lender will have no options or easy recourse to recover. As such, credit cards are provided to people of regular income and to those who have a good repayment history; in other words, those who have good creditworthiness. Here comes the role of the Credit Information Bureau of India Limited (CIBIL). This CIBIL maintains the credit history of a person. This history/information include all types of loans, secured or unsecured. The CIBIL gives credit score to the person. More The CIBIL score or rating increases the creditworthiness. {“According to Section 2(g), credit scoring” means a system that enables a credit institution to assess the credit worthiness and capacity of a borrower to repay his loan and advances and discharge his other obligations in respect of credit facilities availed of or to be availed of by him.

In one of the cases, “Awaz”, Punita Soceity “Jagrut… vs. RBI and Ors. (2008), the held: (a) charging an interest rate of 30% per annum; (b) charging interest on a monthly basis; and (c) charging penal interest repeatedly out of the default as unfair practices. 

Fraudulent transaction

According to RBI guidelines, banks shall inform the customer to their bank at the earliest and banks shall also mandatedly send alerts to customers of any transaction in the customer’s account, either via SMS or email. Banks shall inform the customer to inform his bank as soon as possible about such fraudulent or unauthorised transactions. The sooner the customer informs the bank about the fraudulent or unauthorised transaction, the better.

First scenario: If there is contributory negligence, or fraud or deficit on the part of the bank, the customer will have no liability or zero liability.

Second scenario: The customer will have no liability or zero liability when neither the bank nor the customer is at fault but the deficiency lies elsewhere in the system and some third party commits fraud, and the customer intimates the bank within 3 days and receives communication from the bank regarding the unauthorised or fraudulent transaction.

The RBI, in its circular dated 8/4/2002 requires banks (excluding RRBs) to reverse/ reimburse the debits arising out of fraudulent transactions. The cases are of 2 types (i) cases where banks are at fault, the bank has to compensate the customer; (ii) cases where neither banks nor customers is at fault, the fault lies in system, and the bank has to compensate the customer upto a limit approved by the board

What are the liabilities of cardholders

The liability for repayment is on the cardholder. The cardholder has to pay the entire loan amount plus interest accrued. Even if a cardholder gets add-on credit cards in their family member’s name, the liability to repay the due amount is on the primary cardholder. Add-on credit cards are supplementary to the primary card. That means the principal /primary cardholder is responsible for repaying the outstanding amount against his/ her credit card as well as add-on credit cards.

If a cardholder fails to repay the loan amount, the bank/organisation that issued the card can take legal action (civil and criminal) for the recovery of dues. RBI mandates banks shall make best efforts to recover loan through amicable means, customer friendly approach. The Hon’ble Supreme Court has observed that loans that are less than Rs. 10 lakhs can be settled by referring to Lokadalat. RBI, in its circular 24/4/2008, has given quite detailed instructions to banks regarding the engagement of recovery agents by banks. If the bank engages any agent to recover the loan, those agents shall be trained to deal with customers while speaking or taking possession of the property mortgaged/hypothecated.

Key provisions of credit card laws

Key provisions of credit card laws in India include:

  1. Interest rates and fees:
    • The Reserve Bank of India (RBI) sets limits on the maximum interest rates that banks can charge on credit card balances. These limits are designed to protect consumers from excessive interest charges.
    • Banks are required to disclose all fees and charges associated with credit cards, including annual fees, late payment fees, and over-limit fees. This disclosure helps consumers make informed decisions about which credit card to choose.
  2. Minimum payment requirement:
    • Credit cardholders are required to make a minimum monthly payment, which is typically a percentage of the outstanding balance. This requirement ensures that consumers are making progress towards paying off their credit card debt.
    • Failure to make the minimum payment can result in late payments and higher interest rates.
  3. Cooling-off period:
    • Credit cardholders have a cooling-off period of 15 days from the date of receiving a new credit card to cancel the card without any charges. This period gives consumers time to decide if they want to keep the credit card or not.
  4. Credit card statements:
    • Banks are required to send credit card statements to cardholders on a monthly basis. These statements must include information such as the outstanding balance, interest charges, and payment due date. This information helps consumers keep track of their credit card debt and avoid late payments.
  5. Dispute resolution:
    • Credit cardholders have the right to dispute any transactions or incorrect charges on their credit card statements. Banks are required to investigate disputes promptly and resolve them fairly. This process protects consumers from being held responsible for charges that they did not authorise.
  6. Responsible lending practices:
    • Banks are expected to assess the creditworthiness of borrowers before issuing credit cards. They must ensure that borrowers have the ability to repay their credit card debt without undue hardship.
    • This requirement helps prevent consumers from taking on more debt than they can handle.
  7. Debt collection practices:
    • Banks are prohibited from using unfair or abusive debt collection practices. They must provide reasonable repayment options for borrowers who are struggling to repay their credit card debt.
    • This requirement helps protect consumers from being harassed or intimidated by debt collectors.
  8. Data protection:
    • Banks are required to protect the personal and financial information of credit cardholders. They must comply with data protection laws and regulations.
    • This requirement helps protect consumers from identity theft and other forms of fraud.
  9. Regulatory oversight:
    • The RBI regularly monitors the credit card industry to ensure compliance with laws and regulations. It can take action against banks that violate credit card laws, including imposing fines and penalties.
    • This oversight helps ensure that the credit card industry operates in a fair and transparent manner.

These laws aim to ensure that credit cards are used responsibly and that consumers are protected from unfair or deceptive practices.

RBI guidelines for credit cards

The Reserve Bank of India (RBI) has issued various guidelines to regulate the use of credit cards in India. These guidelines aim to protect the interests of both the cardholders and the issuing banks. Some of the key RBI guidelines for credit cards are as follows:

1. Credit card issuance:

  • Banks can only issue credit cards to individuals who meet certain eligibility criteria, such as having a regular source of income and a good credit history.
  • Credit cards cannot be issued to minors or individuals with a history of bankruptcy.

2. Credit limit:

  • The credit limit on a credit card is determined based on the cardholder’s income, debt-to-income ratio, and credit history.
  • Banks are required to obtain the consent of the cardholder before increasing the credit limit.

3. Interest rates and fees:

  • Banks are required to disclose the annual percentage rate (APR) and other fees associated with the credit card in a clear and concise manner.
  • Late payment fees and other charges must be reasonable and cannot exceed certain limits set by the RBI.

4. Minimum payment:

  • Credit cardholders are required to make a minimum payment towards their outstanding balance each month.
  • The minimum payment amount is typically a percentage of the total outstanding balance.

5. Billing statement:

  • Banks are required to send a monthly billing statement to the cardholder that includes information such as the outstanding balance, interest charges, and due date.
  • The statement must be sent at least 15 days before the due date.

6. Dispute resolution:

  • Cardholders have the right to dispute any unauthorised transactions or errors on their credit card statement.
  • Banks are required to have a grievance redressal mechanism in place to handle such disputes.

7. Credit card protection:

  • Banks are required to provide certain protection features to credit cardholders, such as zero liability protection for unauthorised transactions and insurance coverage for lost or stolen cards.

8. Responsible lending:

  • Banks are expected to follow responsible lending practices when issuing credit cards.
  • This includes assessing the cardholder’s ability to repay the debt and avoiding over-lending.

9. Education and awareness:

  • Banks are required to provide educational materials and information to credit cardholders to help them understand the terms and conditions of their credit cards and use them responsibly.

10. Regulatory oversight:

  • The RBI regularly reviews and updates its guidelines for credit cards to ensure that they are in line with the evolving needs of the financial sector and to protect the interests of both cardholders and banks.

Conclusion

As already stated in the beginning, a credit card provides convenience to the cardholder. Among the credit card users, some end up paying more interest, which might be more expensive than they might have thought of. Some of the users may get monetary benefits by complying with the terms and conditions. Some may not be aware of the laws that govern the issuance and operation of credit cards. Here, an effort is made to give the reader a glimpse of guidelines, rules, and a few acts that are applicable to credit cards in India.

References

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