Kerala High Court
M.K. Thampan vs Dhanalakshmi Bank Ltd. And Ors. on 16 October, 1989
Equivalent citations: [1992]73COMPCAS600(KER)
JUDGMENT T. V. Ramakrishnan, J.
1. This is an appeal by the first defendant in a suit for money due to the plaintiff-bank under a loan transaction.
2. The Dhanalakshmi Bank Ltd. (hereinafter referred to as "the bank") granted a loan of Rs. 50,000 to the first defendant for purchase of a fishing boat. As security for the loan, the three defendants jointly executed exhibit A-1 demand promissory note for Rs. 50,000 in favour of the bank on November 26, 1976. The first defendant also executed a hypothecation deed, exhibit A-2, on the same day, hypothecating the boat called Sindhu purchased by utilising the loan amount. As collateral security, exhibits A-3 to A-5, title deeds of immovable properties of the defendants were deposited with the bank by way of equitable mortgage as per three memoranda of deposit of title deeds marked as exhibits A-6 to A-8. After availing of the loan, the defendants have also acknowledged their liability under the loan transaction as per exhibits A-9 and A-10 dated July 26, 1979, and October 23, 1981, respectively. Since the defendants failed to repay the loan in full, the plaintiff-bank instituted the present suit for realisation of a total sum of Rs. 58,921.40 with 18.5% interest per annum from the date of suit till realisation and costs of the suit by the sale of the fishing boat and the immovable properties charged for the debt.
3. Defendants Nos. 1 and 2 while admitting the loan transaction as detailed in the plaint, mainly disputed the correctness of the amount claimed in the plaint and the bank's right to claim interest at a rate higher than 10% per annum simple interest. It was alleged that the amount has been claimed in the plaint after calculating interest at a rate much higher than 10% and that too with rests. It is the case of the defendants in their written statement that they have already paid a total amount of Rs. 1,50,000 and if the account is settled afresh after recalculating the interest at 10% simple interest no amount will be found due to the plaintiff. Before the court below, the defendant relied upon exhibit B-1 photocbpy of a letter sent by the Reserve Bank of India to the President, Kerala Federation of Mechanised Boats Owners' Association, Quilon, in support of their contention that the Reserve Bank of India has restricted the rate of interest chargeable in regard to agricultural loans like the one availed of by the defendants to 10% and that the plaintiff-bank is bound by the circulars fixing the rate of interest issued by the Reserve Bank and referred to in exhibit B-1. It was also contended that the plaintiff is bound to recalculate the amount due as per the loan transaction and the suit can be decreed only for the balance, if any, found due after such recalculation and settlement of accounts.
4. With reference to the dispute raised regarding the rate of interest and calculation of interest with rests, the learned judge framed the following issues :
"Is the interest claimed excessive and if not, what is the interest allowable ?
Whether the memo of accounts is correct and what is the amount due to the plaintiff ?"
5. The learned judge found that the interest as charged by the bank at 15% is in accordance with the terms contained in exhibit A-1 pronote and as such the defendant cannot challenge the rate and manner of calculation of interest adopted by the bank in exhibit A-11 memo of accounts. It was also found that the defendants have not shown how the memo of accounts is incorrect. However, it was found that the loan under which money was paid to the first defendant was an agricultural loan and not a commercial loan. Hence, the learned judge allowed future interest only at 6% per annum. In the circumstances, a decree for the plaint claim of Rs. 58,921.40 with 6% interest per annum from the date of suit alone was passed, charged on the fishing boat and the immovable property furnished as security for the loan.
6. In the appeal, the appellant has filed two applications to receive certain additional documents in evidence. C. M. P. No. 6429 of 1989 is an application to receive two documents as additional evidence in the case. The first document is a photocopy of a judgment in O. S. No. 302 of 1983 before the Sub-Court, Alleppey, and decided by that court on March 10, 1986. It is the contention of the appellant that the Sub-Court, Alleppey, had in the judgment in O. S. No. 302 of 1983 referred to and relied upon certain relevant circulars issued by the Reserve Bank restricting the rate of interest chargeable for agricultural loans. The second document again is a photocopy of a circular dated February, 28, 1983, issued by the Reserve Bank of India, specifying the rate of interest chargeable by all scheduled commercial banks on certain types of loans. The said circular is one issued in supersession of an earlier circular dated February 28, 1981, referred to in the circular itself. C. M. P. No. 8588 of 1989 is a petition again to receive another typed copy of a circular dated December 12, 1977, purported to have been issued by the Reserve Bank and certified as true copy by the appellant. It is contended that the said circular which also restricts the rate of interest and manner of charging interest on agricultural loans is applicable to the plaintiff-bank and to the loan transaction between the defendants and the bank. Hence, learned counsel has submitted that the petitions to receive additional documents may be allowed.
7. The only point urged by learned counsel for the appellant, Sri P. N. Ramakrishnan Nair, is the one relating to the validity of the rate and the manner of charging of interest adopted by the bank in the instant case. According to counsel, the loan availed of by the first defendant is indisputably an agricultural loan as contemplated in the various circulars issued by the Reserve Bank stipulating the maximum rate of interest chargeable on such loans. As such, the plaintiff-bank is bound by the various circulars issued by the Reserve Bank of India regarding interest on agricultural loans, and can claim interest on the loan in question only at the specified rate notwithstanding the fact that a higher rate of interest with rests had been agreed to by the parties and notwithstanding the fact that the bank had already settled the accounts on the basis of agreed rates without protest from the parties. Learned counsel would also contend that an acknowledgment of the liability on the agreed basis may not also preclude the parties from claiming the benefits of the said circulars and demanding a recalculation and resettlement of the accounts. The courts will not allow the banks to claim anything more than what is due as interest at the rate specified in the relevant circulars. Learned counsel has relied upon Sections 21 and 21A of the Banking Regulation Act and the decisions in Bank of India v. Karnam Ranga Rao [1988] 64 Comp Cas 477 and Krishna Reddy v. Canara Bank, AIR 1985 Kar 228.
8. A mere reading of exhibits A-6 and A-7 would clearly show that the loan facility availed of by the first defendant is an "agricultural loan". Hence, in the light of the decision in Bank of India v. Karnam Ranga Rao [1988] 64 Comp Cas 477 (Kar), the circulars issued by the Reserve Bank of India, photocopies of which have been produced by the appellant and others referred to in the above decision may have a direct bearing on the question raised by the appellant in the appeal.
9. In the decision in Bank of India v. Karnam Ranga Rao [1988] 64 Comp Cas 477, a Division Bench of the Karnataka High Court has dealt with the question in great depth after issuing notice under Order 1, Rule 8, to the Reserve Bank of India and calling from them a report in the matter and after hearing them. In the said decision five circulars issued by the Reserve Bank from 1972 onwards relating to charging of interest were referred to and considered by the Bench.
10. The circulars referred to are as follows :
Circular No. 1, dated March 14, 1972.
Circular No. 2, dated October 5, 1974.
Circular No. 3, dated March 13, 1976.
Circular No. 4, dated August 17, 1976.
Circular No. 5, dated February 28, 1978.
11. On a consideration of the contents of the said circulars, the Division Bench came to the following conclusions (p. 491) :
"The circulars/directives of the Reserve Bank direct that agricultural advances should not be treated on par with commercial loans in the matter of application of the system of compounding interest. . .
Banks should not compound interest on current dues. Banks should not also charge interest with monthly, quarterly or half-yearly rests on overdue loans. Perhaps, it may not be illegal to charge interest with yearly rests."
12. While coming to the above conclusion, the Division Bench has observed thus (at page 483) :
"The courts cannot reopen any account maintained by banks relating to transactions with its customers on the ground that the rate of interest charged, in the opinion of courts, is excessive or unreasonable. Section 21A of the Banking Regulation Act is a restraint on such power of courts. However, in any case, if it is proved that the interest charged by banks on loans advanced is not in conformity with the rate prescribed by the Reserve Bank, then the court could disallow such excess interest and give relief to the party notwithstanding the provisions of Section 21A. Banks are bound to follow the directives or circulars issued by the Reserve Bank prescribing the structure of interest to be charged on loans and any interest charged by banks in excess of the prescribed limit would be illegal and void. Banks cannot charge compound interest with quarterly rests on agricultural advances."
13. From the above decision, it is clear that the circulars issued by the Reserve Rank of India regulating the rate of interest chargeable on agricultural and other loans referred to in the circulars and the manner of charging interest on such types of loans are issued in exercise of its powers under Section 21 of the Banking Regulation Act. Thus, they are statutory circulars issued with a laudable social objective, namely, reducing the debt liability of a group of debtors forming the weaker but one of the most useful sections of the society. Accordingly, they are binding on all the banks governed by the provisions of Section 21 of the Banking Regulation Act. Though Section 21A of the Act is a restraint on the power of the court, such restraint will not preclude the courts from reopening the transactions between the bank and its debtor if it is established that the bank has, in violation of the directives contained in the relevant circulars or any other provisions of law, charged interest at a rate different from that specified in the circulars and has while settling the accounts compounded interest otherwise than yearly in the case of loans to which the circulars apply. The reason being that it will be wholly illegal to charge interest in violation of the directives contained in the statutory circulars of the Reserve Bank in the cases where the circulars apply. The very justification for the statutory imposition of such a restraint on the powers of the court as contained in Section 21A of the Act can only be the fact that the banking companies functioning under the Act and the Rules and circulars issued thereunder shall only be charging such interest and that too in such manner as is prescribed by the Reserve Bank of India and shall not be acting in an arbitrary or illegal manner. That being the position, Section 21A cannot be legally understood as a provision restraining the courts from exercising its powers to give relief to a party whenever any bank claims anything in violation of the circulars issued under Section 21 of the Act. Thus analysed, I am in respectful agreement with the reasoning and conclusion of the Division Bench of the High Court of Karnataka in Bank of India v. Karnam Ranga Rao [1988] 64 Comp Cas 477.
14. On a careful consideration of the entire facts and circumstances of the case in the light of the legal principles laid down in the decision referred to above, 1 am of the view that the decree and judgment under appeal requires to be set aside and the matter should be directed to be considered afresh. For one thing, the point now urged before me was never raised in the manner in which it is now argued either in the pleadings or even at the time of arguments. Hence, the court below had no occasion to consider the scope, applicability and effect of any of the relevant circulars issued by the Reserve Bank of India from time to time with reference to the particular transaction in question. Moreover, none of the circulars were produced before the lower court and the plaintiff-bank had no opportunity to challenge the applicability of the said circulars to the transaction in question and to make submissions on the scope and effect of the provisions in the circulars with reference to the transaction in question. The court below has only considered the question whether the rate of interest adopted by the bank was in accordance with the agreed rate or not. The court found that the rate adopted and the method of calculation followed is as per the terms of the loan and accordingly accepted the amount claimed in the plaint as perfectly legal. No finding regarding the applicability or otherwise of the various circulars and the exact extent to which and the conditions subject to which they may apply to particular transactions has also been entered by the court below. In the circumstances, I set aside the decree and judgment of the court below and direct the lower court to take on file the suit O. S. No. 59 of 1984 and try and dispose of the same afresh after giving both parties an opportunity to amend their pleading if so found necessary and to adduce evidence in substantiation of their respective contentions. Now since I am directing a fresh trial of the suit, the documents produced before this court in C. M. P. No. 6429 of 1989 and C. M. P. No. 8588 of 1989 are directed to be returned to the appellant. The appellant is at liberty to produce all necessary documents before the court below in substantiation of his claim.
15. The court fee paid on the memorandum of appeal is ordered to be refunded to counsel for the appellant. The parties are directed to bear their respective costs. The records of the case are directed to be forwarded to the court below, urgently. The date for appearance of the parties before the court below is fixed at December 1, 1989.