RBI fines HSBC Rs 29.6 lakh for credit card rule violations: What it means

The Reserve Bank of India (RBI) recently fined HSBC Bank Rs 29.6 lakh for not following credit card rules. But what does this mean for you, the credit card user?

The Reserve Bank of India (RBI), has fined The Hongkong and Shanghai Banking Corporation Limited (HSBC) Rs  29.6 lakh for not following certain credit card rules. This penalty was imposed on June 24, 2024.

What rules did HSBC violate?

RBI has guidelines for how banks handle credit cards, including how they calculate the minimum amount you must pay each month (minimum payment due). According to RBI, HSBC failed to ensure that a specific calculation method, designed to prevent your credit card debt from growing faster than you can pay it off, was being followed in some accounts.

"The bank failed to ensure that there was no negative amortisation while computing Minimum Payment Due in certain credit card accounts," RBI said in a statement.
 

What is Minimum Payment Due?

The minimum payment due is the least amount you need to pay on your credit card bill each month to avoid late fees and penalties. It's typically a percentage of your total outstanding balance.

What went wrong?

The RBI says HSBC's method for calculating the minimum payment due in some cases resulted in "negative amortization." This means the outstanding balance on the credit card actually increased, even though the cardholder made the minimum payment. This can happen when interest charges and other fees are added to the balance faster than the minimum payment can reduce it.

Why is negative amortization a problem?

Negative amortization can trap cardholders in a cycle of debt. Even if they make their minimum payments every month, the total amount they owe keeps going up. This makes it very difficult to ever pay off the credit card balance.

Imagine you have a credit card with a balance of Rs. 10,000 and a minimum payment due of Rs. 1,000 each month. This means you have to pay at least Rs. 1,000 every month to avoid late fees and potential damage to your credit score.

Here's where "negative amortization" comes in:

Scenario 1: Following the Rule (Positive Amortization)

• If the interest rate on your credit card is 2% per month (around 24% annually), the interest charged on your Rs. 10,000 balance for the month would be Rs. 200 (Rs. 10,000 x 2%).
• If the bank follows the RBI rule, they would subtract the Rs 1,000 minimum payment from your balance before calculating the next month's interest. So, your new balance would be Rs. 9,000 (Rs. 10,000 - Rs. 1,000).
• In the next month, the interest would be calculated on the remaining Rs 9,000 balance, which would be slightly lower (around Rs. 180).
• This way, even though you're only paying the minimum amount, your balance gradually reduces over time because the interest is calculated on a smaller amount each month (positive amortization).

Scenario 2: Breaking the Rule (Negative Amortization)

• Now, imagine the bank wasn't following the RBI rule (like what happened with HSBC). They might simply add the interest (Rs. 200) to your existing balance without subtracting your minimum payment.
• This would make your new balance Rs. 10,200 (Rs. 10,000 + Rs. 200 interest).
• In the next month, the interest would be calculated on the higher balance of Rs. 10,200, leading to a slightly higher interest charge (around Rs. 204).
• This creates a situation where even though you're making the minimum payments, your balance keeps increasing due to interest charges snowballing (negative amortization). This makes it very difficult to pay off your credit card debt completely.

What does this mean for HSBC customers?

The RBI's action is focused on ensuring banks follow the rules. It doesn't necessarily mean individual HSBC customers were directly affected. However, if you're an HSBC credit cardholder, it's a good idea to review your past statements and make sure your minimum payment due has been calculated correctly.

What should you do if you think there is an error?

If you suspect an error in your minimum payment calculation, contact HSBC customer service immediately. You can also file a complaint with the RBI if you believe the bank is not following the rules.

RBI wants to ensure credit cards are used responsibly. By making sure the minimum payment covers at least the interest charges, it helps prevent credit card debt from spiraling out of control.  HSBC's failure to follow this rule could have put some customers at risk of accumulating more debt than they could manage.

Additional Points:

• The fine is for rule violations identified during a routine inspection by RBI.
• The penalty doesn't affect the validity of any transactions you've made with HSBC.
• RBI can take further action against HSBC if needed.