FinTechAmendment To The Regime Of Issuance And Conduct Of Debit And Credit Cards In India

INTRODUCTION

The Reserve Bank of India (RBI) recently made amendments to the Master Direction – Credit Card and Debit Card – Issuance and Conduct Directions, 2022, which governs use of debit and credit cards for business accounts. Under the new guidelines, the RBI has made it mandatory for business credit and debit card issuers to provide an effective framework for monitoring the final use of money.

The RBI has promulgated these amendments in the exercise of its powers conferred under Section 35A of the Banking Regulation Act, 1949 and Chapter III-B of the Reserve Bank of India Act, 1934. The amended provisions came into effect from March 07, 2024.

SCOPE AND APPLICABILITY

The provisions pertaining to Credit Cards shall be applicable to all the Banks and Non-Banking Financial Companies (NBFCs) issuing Credit Cards whereas the provisions relating to Debit Card shall only be applicable to the banks operating in India.

KEY AMENDMENTS WITH RESPECT TO THE CONDUCT OF CREDIT CARDS IN INDIA

• Effective Monitoring Mechanism

The notification has made changes to Para 7 (c) of the original Master Direction which authorized Card issuers to provide business credit cards to businesses or business owners to cover costs. Business credit cards can also be granted as charge cards, corporate credit cards, or by connecting a credit facility for business purposes, such as an overdraft or cash credit, according to the terms and conditions of the facility in question.

The amendments mandate that the card issuers must provide an effective system to monitor the final usage of money in the business account. This will ensure early detection of fraud through data leaks or impersonation, while also acting as a surveillance tool to keep prospective money laundering in check.

• Closure of Credit Card

In case a credit card is stolen and the credentials are leaked or tracked, it becomes paramount to close the credit card as swiftly as possible, especially for business accounts which are entitled to much higher credit than personal accounts. The earlier provision required the credit card provider to fulfill any request to close a credit card within seven working days. Non-compliance with the same shall impose a penalty of ₹500 per day of delay on the card-issuers until the account is closed, as long as there is no outstanding balance. The new amendment slightly alters this provision, now the penalty of Rs. 500 shall be applicable on every calendar day.

• Direction regarding interest rates and other charges levied on credit cards

Credit card issuers are instructed to follow the guidelines issued by RBI with regards to interest rates on advances, as updated from time to time, for setting the interest rate on credit card dues. According to the notification, credit card holders must be informed about the consequences of paying only “the minimal amount payable”.

A warning to the effect that “Making only the minimum payment every month would result in the repayment stretching over months/years with consequential compounded interest payment on your outstanding balance” shall be prominently displayed in all billing statements to warn cardholders about the pitfalls of paying only the minimum amount owed. The most important terms and conditions (“MITC”) must expressly state that the ‘interest-free credit term’ will be suspended if any balance from the previous month’s bill remains unpaid.

Card-issuers must report a credit card account as ‘past due’ to credit information companies (CICs) or assess punitive charges, such as late payment costs and other associated charges, if applicable, only if the account has been ‘past due’ for more than three days.

The number of ‘days past due’ and late payment charges shall be computed from the payment due date mentioned in the credit card statement, as specified under the regulatory instructions on ‘Prudential norms on Income Recognition, Asset Classification, and Provisioning pertaining to Advance’ as amended from time to time.

The notification also provides that Late payment and any associated costs will be assessed solely on the outstanding balance after the due date, not on the entire amount due. Further, interest will be charged solely on the outstanding balance, after accounting for payments, refunds, and reversed transactions.

• Requirements pertaining to Billing

The notification provides that the Card Issuers have to publish a list of payment methods allowed by them for credit card payments on their websites and billing statements. Furthermore, card-issuers must urge cardholders to take caution and avoid making payments using methods other than those approved by them.

Any debit to the credit card account must follow the authentication framework established by the RBI from time to time, and not through any other mode/instrument.
Card issuers do not have to follow a standardized billing cycle for all credit cards issued. To allow flexibility in this respect, cardholders must be given the option of modifying the credit card’s billing cycle at least once, at their discretion.

The notification further provides that the period for payment of dues and adjustment of refunds, for business credit cards where the liability is entirely with the corporate or commercial entity (primary account holder), may depend on the agreement between the card-issuer and the main account holder.

• Reporting requirements to CIC

The notification provides that the credit card issuer must specifically notify the customer that any information regarding their credit history or repayment history that is sent to a CIC is being provided in accordance with the Credit Information Companies (Regulation) Act, 2005.

Before reporting a credit cardholder’s default status to a CIC, card issuers must verify that they follow the method specified by their Board and notify the cardholder. The notification further provides that if the cardholder pays his or her dues after being identified as a defaulter, the card issuer must notify CIC within 30 days of the settlement.

Card issuers must also use extra caution when dealing with cards that are the subject of ongoing disputes. Information, especially on the default, must only be revealed or released once the issue has been resolved. In all circumstances, a well-defined protocol must be clearly followed and made a part of MITC.

KEY AMENDMENTS WITH RESPECT TO THE CONDUCT OF DEBIT CARDS IN INDIA

• Issuance of Debit Cards

No bank shall provide debit cards for cash credit or loan accounts. However, it would not prevent banks from attaching the overdraft facility given with Pradhan Mantri Jan Dhan Yojana or Kisan Credit Card accounts to a debit card.

• Issuance of Form Factor

The notification has added a new chapter on the Issuance of Form Factor. According to the notification, card issuers may offer various form factors, such as wearables, instead of/in addition to a plastic debit/credit card after receiving the customer’s express agreement. Form factors must adhere to all particular and general criteria relevant to the respective cards. Card issuers must give alternatives for disabling or blocking the form factor as per Reserve Bank directives provided from time to time.

• Co-branded cards

Co-branded cards must explicitly state that they are issued under a co-branding arrangement. The co-branding partner is prohibited from advertising or selling the co-branded card as his own product. The card issuer’s name must be clearly displayed in all marketing/advertising materials.

The co-branding partner (CBP) shall not have access to information about transactions made with the co-branded card. However, for the convenience of cardholders, card transaction data may be extracted straight from the card issuer’s system in an encrypted format and shown in the CBP’s platform with strong security. The information presented on the CBP’s platform is only available to the cardholder and will not be accessed or retained by the CBP.

Further, all banks, including Payments Banks, State Co-operative Banks, and District Central Co-operative Banks and NBFCs registered with the RBI (NBFCs – ICC, HFC, Factor, MFI, and IFC) would not need prior clearance to become a co-branding partner of card issuers.

• Increased security

A standard operating method subject to the approval of the Board (referring to the Board of Directors of the card issuers) is to be followed in case the card issuers decide to block/deactivate/suspend a debit or credit card. Furthermore, it must be assured that blocking/deactivating/suspending a card or withdrawing benefits offered on any card is communicated to the cardholder immediately, along with the reasons for doing so, via electronic means (SMS, email, etc.) and other accessible channels.

If an existing card is being renewed, the cardholder must be given the choice to deny the renewal before the renewed card is sent out. Furthermore, if a card is banned at the request of the cardholder, a new card will be supplied with the cardholder’s explicit agreement.

AMLEGAL REMARK

The RBI has issued the discussed notification in the wake of an increased emphasis on individual privacy of businesses and business owners as well as increase the number of checks and balances to such accounts. As legal entities, small-medium businesses often need separate bank accounts to carry out necessary transactions, deposit profits and take loans in the due course of business.

The amended provisions aim to put in place an effective mechanism to monitor and track the end usage of funds and to avoid any unauthorized mechanism to make business-to-business card payments. The provisions emphasize the need for explicit consent from the cardholder in order to share data and explicit consent with any outsourcing partners.

– Team AMLEGALS assisted by Ms. Deepanshi Kapooor

For any queries or feedback feel free to reach out to mridusha.guha@amlegals.com or jason.james@amlegals.com