The Reserve Bank of India (RBI) had changed the methodology and adjustment of minimum balance paid on a credit card bill payment, and several banks which have issued credit cards have already started intimating customers about the same.
A reader reached out to us saying that he too received an intimation about the same, but was confused as to what this new methodology to calculate the credit card bill payment’s minimum payment feature meant.
“As per recent RBI guidelines, the minimum payment due (MPD) for your credit card will be calculated as higher of (100 per cent of all interest, fees and taxes; 5 per cent of total payment due of the statement), plus higher of (past due amount; overlimit amount, if any) plus equated monthly instalment (EMI) amounts due (if any). This will be effective from December 1, 2022,” the intimation which the reader received (name of bank withheld), read.
Chitrabhanu K G, senior vice president and country head, retail assets and cards, Federal Bank, said that this (new method of calculation) is a beneficial move for the consumer since there will be no negative amortization i.e. finance charges, taxes will not capitalized in the next billing statement, the outstanding amount will be revised if there is any payment, payment reversals and sale refunds/reversals till the payment due date. Late payment charges will be levied only on the revised amount if the customer makes a part payment out of the minimum amount due before the payment due date.
The RBI had in a master circular titled ‘Credit Card and Debit Card – Issuance and Conduct Directions, 2022’ said that the terms and conditions for payment of credit card dues, including the minimum amount due shall be such that it makes sure there is no ‘negative amortisation.’
“The unpaid charges/levies/taxes shall not be capitalised for charging/compounding of interest,” the RBI said.
For example: Suppose one has a credit card with a credit limit of Rs 15,000 and has an existing outstanding balance of Rs 10,000. Now assuming the monthly interest is 2 per cent, so you need Rs 200 as interest, and assuming Rs 50 as goods and services tax (GST) and other taxed charges, you need to make a minimum payment of Rs 250 to pay off the monthly interest.
Hence anything lower than Rs 250 will result in negative amortisation i.e. you will never be able to repay the principal loan and pay only the interest if you pay the minimum balance. This can lead you to a debt trap cycle.
Hence, the RBI introduced the new methodology to calculate the interest so that capitalisation of interest and other charges in a credit card bill can be avoided, if one is paying only the minimum amount due.
This is why the reader got an SMS from his bank stating that apart from recovering 100 per cent of the interest component, some percentage will also be taken for repaying the principal, so that after a certain timeframe the loan gets relinquished.
Chitrabhanu K G of Federal Bank said that the minimum amount due (MAD) generally covers a portion of the principal balance plus finance charges, taxes plus EMI instalment. If a customer paid the minimum amount due, interest was levied on the remaining unpaid principal from the total amount due.
"Only if the MAD was not paid, all unpaid charges, taxes, interest were capitalized for compounding of interest. With this change, only unpaid interest will get capitalized," Chitrabhanu K G further added.
S Anand, CEO and co-founder, PaySprint, a fintech company, said, "I believe this is highly beneficial since it makes credit cards more practical for consumers. It does away with chances of negative amortisation, which is when paying a fixed amount every month does not reduce the overall amount you owe as the payment made is not enough to cover the interest. This is especially prevalent in the cases of monthly minimum amount payers as that amount is not sufficient to clear the interest threshold."
There is a concept of interest-free period in credit cards, usually 20 to 45 days or higher in some cards. This means if one takes a credit to purchase and repays back the money within this stipulated time, no interest will be charged.
But whenever there is an outstanding credit balance in the credit card, the interest-free period is suspended on subsequent new purchases.
“The most important terms and conditions (MITC) shall specifically explain that the ‘interest-free credit period’ is suspended if any balance of the previous month’s bill is outstanding. The card issuers shall specify in the billing statement, the level of unpaid amount of the bill i.e., part payment beyond ‘minimum amount due’, at which the interest-free credit period benefits would not be available to cardholders,” the RBI said.
"Any new transactions on the card become eligible for the interest free period only if the outstanding balance from the previous bill is completely paid off. If there is an outstanding balance carried over, interest will be charged on the balance and new transactions," S Anand of PaySprint further added.
The RBI said that any penal interest, late payment charges or other related charges shall only be levied on the outstanding amount after the due date, and not on the total amount.
Apart from this, credit card issuing companies shall report a particular account as ‘past due’ to credit information companies (CICs), or levy penal charges only when a credit card account remains past due for “more than three days.”
The RBI directed all credit card issuers that they should prescribe an interest rate ceiling for credit cards in line with other unsecured loans, including processing and other charges. But in the case of the interest rate varying due to payment/default history of the cardholder, then there “shall be transparency in levying such differential interest rates.”
The RBI also directed that the interest rates as prescribed in the board approved policy and the rationale for such a rate will be auditable.
