Don't levy high rates on credit cards, banks told

Seeking to tighten the leash on credit card issuing banks, the Reserve Bank has asked them not to charge excessive interest rates on personal loans and prescribe a ceiling rate on small advances, a move that will benefit lakhs of card users.

While issuing fresh guidelines for credit card operations, the RBI has also directed the banks not to reject credit card applications of customers without assigning reasons in writing.

The central bank also made it clear that the banks would be liable for misuse of unsolicited cards and "the persons in whose name the card has been issued cannot be held responsible for the same (misuse of credit cards by other persons)."

As regards the interest rates, the RBI said the banks "should prescribe a ceiling rate of interest, including processing and other charges, in respect of small value personal loans and loans of similar nature...the instructions would apply to credit card dues also."

Although the RBI has not specified the limit of the interest rates that can be charged by the banks issuing credit cards, it had earlier clarified that "the total cost to the borrower, including interest and all other charges levied on a loan, should be justifiable having regard to the total cost incurred by the bank in extending the loan."

In case the unsolicited card is activated and misused without the consent of the recipient, RBI said issuing bank will be required to reverse the charges and pay a penalty to which would be twice the amount of the charges reversed.

The central banks issued the guidelines on Wednesday based on a study of credit card operations in the backdrop of complaints received by the RBI and Banking Ombudsmen.

While tightening the provisions for issuing insurance cover to credit card holders, the RBI asked the banks to "obtain in writing from the credit card holder the details of nominee/s for the insurance cover in respect of accidental death and disablement benefits."

Banks, it added, would have to ensure that the relevant information about the nominees are recorded by the insurance companies.

In addition, the banks should also intimate the credit card holders the details of insurance company which would handle the claims regarding the insurance cover.

As regards credit cards to students, the RBI said the banks should independently assess the credit risk "while issuing cards to persons, especially students and others with no independent financial means." The banks, the RBI stressed, "need to ensure prudence while issuing credit cards."

Responding to complaints of the certain professionals regarding non-issuance of credit, the central bank has made it obligatory on banks "to convey in writing the main reasons (to the applicants) which have led to the rejection of the credit card applications."

To prevent misuse of credit cards, RBI has asked the banks to consider issuing signature laminated cards alongwith photographs and PIN.

RBI has also asked the banks to put in place a mechanism to ensure customers' acknowledgment for receipt of monthly statement.

There should be no delay in dispatching bills and the customers should be given at least one fortnight for making payments before charging the interest rates, the central bank said.

The banks, it added, should also consider sending credit card bills and statements of accounts online.