Controlling Interest

LAST WEEK the Supreme Court ruled in a 16-year-old case that charging interest above 30 per cent on unpaid credit card dues was legal. A few days ago, in the US, Democratic Senator Bernie Sanders said that he was going to introduce legislation capping credit card interest rates at 10 per cent. He knows that it is not going to get passed. He is only trying to embarrass the soon-to-be president of the country, Donald Trump, who had in a campaign speech said that the interest rates charged on cards was too high and he would bring it down to 10 per cent. Sanders knows Trump is not going to do it.

Those interest rates underpin the industry which is a major component of the financial system. Capping the interest would be disruptive. Profits of banks would take a hit, share prices would fall and there would be other second-degree repercussions. All of which does not negate the certainty that these rates would be called usuri­ous if charged by any other legitimate financial institution. In India, unpaid credit card dues can command around 40 per cent annual interest, sometimes even going to 50 per cent. Such num­bers slip under the radar because the interest is always quoted in monthly terms, of say 3 or 4 per cent, which looks reasonable if the assumption is that these are not debts to be held for long periods. The reality however is that many users fall into a trap be­cause, as with any usurious loans, the longer you hold it the more impossible it becomes to repay.

The rationale for such high rates is that these are unsecured loans and the risk of non-payment is high. But then, how do you explain personal loans, which are also unsecured, being given in the 10 to 20 per cent interest range? It could be argued that there is vetting on whom to give them to, but that is true for credit card companies too. They have access to CIBIL scores and financial profiles of an applicant. If they still choose to give it, then they have made an equation where the rates will lead to better profits despite the defaults.

People ought to be financially aware to make an informed decision on whether they want to take on such debts but that is a chimera. Even in a developed country like the US, credit-card loan defaults at present have touched the highest mark since the recession of 2008. India, with its poverty, literacy levels and absence of access to conventional loans, has even less safeguards against such an instrument. In the 1960s and 1970s, the villain of Bollywood movies was often a moneylender charging usurious rates. You don’t see them now because laws prevent such exploitation, at least in the formal economy. The credit-card sector is that outlier where rates like these retain acceptability. It is left to people to protect themselves against it when everyone knows they really aren’t that wise.

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