The culture of credit cards has become very famous in India, especially among the middle class. The number of cases of credit card default has also increased as a consequence. This article aims to discuss the concept of credit card default, the consequences of a credit card default, the provisions attached in such a scenario, and the landmark judgments related to it.
It has been published by Rachit Garg.
Table of Contents
Introduction
The use of credit cards in India has become very common. Lately, banks have relaxed the procedure for obtaining a credit card to a great extent. This provides consumers with the option to avail credit from the bank up to the pre-defined credit limit. However, the bank levies hefty interest in case of a credit card default. When a customer defaults on payment of the credit card bill, the bank seeks legal recourse to recover the outstanding amount. The legal recourse is of both a civil and criminal nature. This article discusses what legal remedy is available with the banks to recover the credit card defaults and what the punishment is for credit card defaulters in India.
What is a credit card default
When a bank issues a credit card to a consumer, it provides the option to avail a short-term credit with the bank. Whenever a credit card is used with a merchant, the bank makes the payment on behalf of the consumer, and this credit has to be paid back to the bank within a specified period (generally 20 days from the billing date). When a customer fails to repay the credit, a situation of credit card default arises. From the date of default, the bank has the right to recover the amount due.
Consequences of credit card default
The consumer is legally bound to repay the credit to the bank. This bestows upon the bank the legal right to recover the amount. For the same, the bank does not take recourse directly to a legal proceeding. Rather, it takes certain steps to recover the amount without any judicial intervention. Some of the consequences of a credit card default are as follows:
- Late payment fee
The bank can levy a late payment fee in case the payment is not made before the due date.
- Higher interest rate
The bank has an option to levy not only a late fee but also a very high rate of interest on the outstanding amount. The rate of interest can be as high as 40% per annum. This leads to a debt trap for the defaulter.
- Credit score
The credit score of a person can be understood as his creditworthiness. In other words, a credit score is an indicator of how likely it is that a person will make the payment of a debt on time. The higher the credit score, the better the interest rates one gets on loans. If a person is a credit card defaulter, his credit score could be adversely impacted. This also ultimately affects an individual’s ability to get a future loan.
- Blocking of the credit card
The bank has the option to block the credit card account in case of a default, which in turn, impacts the credit score and makes it difficult for the defaulter to obtain new credit cards or even a loan.
- Asset acquisition
In a few cases, the bank also has the option to seize the assets of the defaulter. Any condition to the same effect must be checked in the “Most Important Terms and Conditions” while applying for the credit card.
- Legal action
If the person fails to make timely payment of a credit card bill, the bank can approach a civil court of proper jurisdiction for the recovery of money due by the cardholder. In certain circumstances, if the default is continuing and the bank is able to identify the mala fide intention of the defaulter, a criminal action under Section 420 of the Indian Penal Code, 1860, may be initiated. However, this is not a common practice as the mala fide intention is difficult to prove.
- Recovery by Agents
Most of the banks and financial institutions have their own recovery houses. In prolonged delay of repayment of debt, a bank may even send a recovery agent to put pressure on the debtor and recover their debt. Though this method is unethical and may not be true in all cases, banks do exercise this option to recover their debt.
Legal provisions surrounding a credit card default
The default in payment of a credit card is treated as a default in payment of a loan. So, the law that is applicable in cases of loan default is also applicable in cases of credit card default. Many times, it happens that the debtor repays the pending amount through the medium of cheque. In such a scenario, in the event of a cheque bounce, banks often resort to Section 138 of the Negotiable Instruments Act, 1881. Accordingly, the bank reserves the right to initiate a criminal suit against the debtor just as in any other case under Section 138, i.e. to say that, the cheque should be presented within the stipulated period of six months, and notice should also be served within thirty days of receipt of the information of cheque bounce. If both of these conditions are fulfilled, the bank can proceed with the initiation of a lawsuit. For example, recently, the State Bank of India, in its prospectus for SBI Cards, disclosed that it has filed more than 19000 cases under Section 138 against credit card defaulters.
As for the civil remedies for a credit card default, a recovery suit under Order XXXVII of the Code of Civil Procedure, 1908 can be filed by the bank. Order XXXVII Rule 1 provides that the Order shall be applicable in suits involving bills of exchange, promissory notes, hundies, etc., and where the plaintiff seeks to recover a debt from the defendant, with or without interest. The debt may arise out of either a written contract, an enactment, or a guarantee. Suits under Order XXXVII are of the nature of a summary suit, which provides for expedient disposal of a suit, thus providing additional procedures than an ordinary suit.
Apart from the civil and criminal provisions discussed above, the provisions of the RBI guidelines are also attracted when a credit card default takes place. The RBI issued the Master Circular on Credit Card Operations of Banks in 2011, which includes the procedure to be followed by the banks for credit card operations. The Master Circular also provides guidelines to be followed by the banks in cases of credit card default. The annexure to the Master Circular provides that the bank should clearly notify the cardholder regarding the charges and interest rate in case of default, as well as the procedure that would be followed in such cases, in the Most Important Terms & Conditions (MITC) of the credit card. Moreover, in cases of chronic default, the bank shall notify the Credit Information Companies (like CIBIL) regarding such default in order to alter the credit score accordingly.
Credit Information Company
A Credit Information Company (CIC) is an RBI-licensed entity that collects, maintains, and analyses the consumer and business credit information of individuals and companies across the nation, as provided by the financial institutions. This allows the company to maintain a credit score for the individuals, which could be perused by the banks to check their credit-worthiness. One of such companies, which is widely renowned in India, is TransUnion CIBIL [formerly known as Credit Information Bureau (India) Limited]. Thus, it is a common saying that in case of a credit card default, the CIBIL score may be adversely affected.
Judicial pronouncements
ICICI Bank v. Prakash Kaur [(2007) 2 SCC 711]
In this case, a writ petition was filed by the respondent before the Allahabad High Court for directing the police officers to register the FIR against the bank and its agents for unlawfully seizing the respondent’s vehicle. She took a loan from the Appellant bank to purchase a truck, and had defaulted in the payment of one of the instalments. On such default, the bank hired third-party recovery agents, who unlawfully seized the said vehicle. The Allahabad High Court disposed of the writ petition directing the registration of the FIR. However, the Hon’ble Supreme Court overturned the decision and directed the parties to reach an amicable settlement.
In a concurring opinion, Justice Dr. AR Lakshmanan provided certain guidelines that could be followed by the banks to avoid harassment of customers in default of a credit card bill or a loan. The suggestions included a defined threshold for a chronic defaulter, avoiding third-party agents for recovery, providing clear information regarding charges and interest rates in each and every statement, automatic blocking of the card on first default, etc. It was also opined that the guidelines issued by the Reserve Bank of India should be properly followed.
Praveenkumar v. HSBC Ltd. [(2014) 2 CTC 828]
In this case, the issue before the Madras High Court was the maintainability of a summary suit under Order XXXVII of the CPC. The Appellant herein used various credit cards issued by the Respondent bank and defaulted on the repayment of the same. The maintainability of the summary suit was challenged on the ground that the credit card was neither a bill of exchange nor a hundi, as provided under Rule 1 of Order XXXVII. However, the Court held that since the customer has to sign the terms and conditions prior to using a credit card issued by the bank, it becomes a valid contract. In the absence of a written and binding contract between the bank and the customer, the bank would not be liable to pay any amount to the merchant on behalf of the customer. Thus, a valid contract exists where a credit card is issued, and in case of a dispute, the plaintiff (the bank) has the right to file a summary suit under Order XXXVII. Hence, the suit was held to be valid, and since the appellant had not filed the written statement within the stipulated time, the case was rightly dismissed.
Conclusion
The entry of various multinational banks has spread the culture of using credit cards among all classes, including the middle class, lower-middle class, and low income families. However, the hardships arising out of this culture are to be faced only by the lower income groups. The banks often sell these services while withholding crucial information regarding the consequences of a credit card default. Information about the high interest rates, charges, and fines in the event of a credit card default is hidden in the fine-print of the terms and conditions, which is more than often ignored by a consumer. It is only when a credit card default takes place that the “witch-hunt begins”. Such instances have been reported in judgments, as has been discussed above. The Court also took note of how the credit card default becomes a difficulty for the defaulter. In ICICI Bank v. Prakash Kaur, the Court took the opportunity to suggest changes in the system, which can be seen in the RBI Master Circular of 2011. The RBI obliges the banks to follow such mandates in order to protect consumers.
Suggestions
The following are a few easy steps that could be adopted by cardholders to avoid credit card default:
- Timely payment of bills – Third-party apps and websites often send notifications before the due date. Such notifications must not be ignored.
- Judicious use of credit – One must not use more than the credit limit of the card. Moreover, it is recommended that one use only 30% of the credit limit in order to manage the credit card in a better manner
- Payment of the full credit card bill – The credit card companies often specify the minimum amount to be paid towards a bill. The cardholder should be cautious because if only the minimum bill is paid, the bank starts charging interest on the remaining amount and treats it as a default after a certain period.
- Approach the bank for resettlement plan – In various cases, the credit card default is not wilful but because of any compelling circumstances or mistake. In such cases, if the defaulter is able to make his or her case, they are helped by the bank in structuring a resettlement plan, through which the defaulted amount can be paid in installments.
- Credit card balance transfer – In cases where credit card dues are very high and the cardholder would not be able to pay the dues on time, they may opt for credit card balance transfer. It allows the cardholder to transfer the dues of one credit card to another, which has a lower interest rate. This helps the cardholder pay a lower interest rate in case of default as well as a relaxation in the payment due date.
Frequently Asked Questions (FAQs)
The bank sends the minimum bill amount in the monthly statement. Should I pay just the minimum bill amount or the full amount?
The banks often send only the minimum bill amount rather than the full amount. This is done so that a cardholder pays only a part of the bill, and the banks can charge interest or late fees on the remaining amount. The details about the charges and interest rates are often put in the fine print, which is ignored by the majority of cardholders. To avoid any charges, the cardholder should check the detailed statement and make the full payment before the due date.
After a credit card default, can the cardholder approach the bank for a planned repayment?
If the cardholder is a loyal customer of a bank, the bank will often allow a repayment structure or even waive interest or late fee charges. The cardholder should always check with the bank in case of a default before availing of such options.
References
- https://paytm.com/blog/credit-card/consequences-of-credit-card-defaulter/
- https://www.rbi.org.in/commonperson/English/Scripts/Home.aspx
- https://www.livemint.com/companies/news/can-t-pay-your-credit-card-bill-you-could-face-criminal-charges-11575347756071.html
- https://www.livemint.com/money/personal-finance/unable-to-repay-loan-legal-rights-viable-steps-that-defaulters-must-follow-11689579763672.html
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