In a circular issued late last night, the Reserve Bank of India (RBI) has asked credit card issuers not to levy excessive charges and to prescribe ceiling rates, including processing charges.

The central bank has also said that banks will have to bear any losses arising out of unsolicited cards that they issue.

Banks will also be liable to pay compensation on unsolicited cards. If a bank has levied charges on an unsolicited card, it will not only have to reverse the charges but also pay a penalty that can be up to twice the value of the charges that are reversed.

In addition, the regulator has suggested that banks should introduce insurance cover to deal with liabilities arising out of lost cards. Such a cover can be provided to card-holders who are ready to bear the cost of the premium, the circular said.

One major relief for card-holders will be in the form of interest rate on credit card outstandings, which varies between 1.5 per cent and 3.5 per cent a month and translates into an annual rate of up to 42 per cent.

Making it clear that higher rates cannot be justified on the basis of a card-holder's record, the regulator has asked banks to clearly inform customers the reasons for variable charges.

The RBI has also decided to extend last year's instructions on interest rates governing loans to credit cards.

In May 2007, the regulator had asked banks to ensure that under no circumstances the interest applied on loans exceed the principal amount. Just like personal loans, the RBI wants banks to fix a ceiling on the rates for credit cards, besides justifying the charges.

Banks have often justified higher interest rate on credit card dues on the grounds that they are unsecured loans that are prone to default. The delinquency rate in India is 6-8 per cent, bankers said.

Banks have also been asked to clearly specify all the charges that can be levied whenever they dole out the cards "free of charge".

These instructions to banks follow a study by the regulator based on the complaints it received and the information provided by the banking ombudsmen.

Of the 22 points mentioned in the circular, at least nine are a reiteration of the RBI's earlier instructions.