Kerala High Court
K. Pushpangadan vs Federal Bank Ltd., Alwaye And Anr. on 1 July, 1999
Equivalent citations: AIR1999KER421, [2000]101COMPCAS197(KER), AIR 1999 KERALA 421, (1999) ILR(KER) 3 KER 264, 1999 KERLJ(TAX) 232, (2000) 1 CIVILCOURTC 27, (1999) 2 KER LJ 486, (1999) 3 KER LT 619, (2000) BANKJ 816, (2000) 101 COMCAS 197, (2000) 1 CURLJ(CCR) 229, (2000) 3 BANKCLR 563
JUDGMENT Rajan, J.
1. The first respondent is the plaintiff in the suit filed for recovery of the money advanced by the Bank to the appellant on account of a loan he took for agricultural purposes. According to the plaintiff, as per the terms of the loan, the amount was repayable on demand within twelve months in a lump sum with interest at 16.5% at quarterly rests. As a security for the advance, the appellant executed a demand promissory note in favour of the Bank. He also executed a hypothecation agreement in favour of the Bank. A collateral security was also offered as equitable mortgage in respect of the scheduled property by depositing the title deed.
2. The appellant contended in his written statement, inter alia, that the action of the Bank in charging interest at the rate of 16.5% per annum was unauthorised and illegal. The directions is-sued by the Reserve Bank of India to the Scheduled Banks in the matter of charging interest for loans are binding on the Bank. According to the above circulars, the Bank is precluded from charging interest on agricultural loans in excess of 13.5 per cent. Therefore it was contended that the agreement to pay interest at the rate of 16.5 per annum is opposed to public policy. The suit was decreed allowing the plaintiff to realise from the defendants and their assets and also charged over the scheduled property, the loan amount with interest thereon at the rate claimed in the plaint and at 6% from the date of the suit till realisation of the amount. Aggrieved by the decree and judgment of the lower Court, the appellant has filed this appeal.
3. Sri. C.V. Vasudevan, learned counsel for the appellant contended that the charging of interest at the rate of 16.5 % is illegal and opposed to the various circulars issued by the Reserve Bank of India. The directions issued by the Reserve Bank of India are statutory in nature and therefore the Bank has, got a duty to abide by them. The Court is also entitled to take note of the provisions contained in the above circular. The learned counsel also relied on the decisions of the Karnataka High Court and one decision of this Court.
4. In the ruling reported in D. S. Gowda v. Corporation Bank, (AIR 1983 Kant 143) a Division Bench of the Karnataka High Court held that the Banks are bound by the directives and circulars issued by the Reserve Bank of India. Section 21 of the Banking Regulation Act provides that such directives could be issued in the public interest or in the interest of depositors or in the interest of Banking policy. Therefore according to the Kamataka High Court these circulars are not only statutory directives but also statutory instruments of national policy.
5. In the ruling reported in H.P. Krishna Reddy v. Canara Bank, Bangalore, AIR 1985 Kant 228, a Division Bench of the Kamataka High Court had occasion to consider the impact of Section 21A of the Banking Regulations Act. Section 21-A of the Banking Regulation Act as amended by the Banking Laws (Amendment) Act 1983 reads as follows :
"21-A. Rates of interest charged by Banking Companies not to be subject to scrutiny by Courts -- notwithstanding anything contained in the Usurious Loans Act 1918, or any other law relating to indebtedness in force in any State, a transaction between a Banking Company and its debtor shall not be reopened by any Court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive."
The Division Bench of the Karnataka High Court held that Section 21A has no bearing on the jurisdiction of Courts to give relief to an aggrieved party when it is established that the Bank in a particular case has charged interest in excess of the limit prescribed by the Reserve Bank of India.
6. Yet another ruling of the Karnataka High Court reported in Bank of India v. Karnam Ranga Rao, 1988 Com Cas 477 : (AIR 1986 Kant 242), deals with the same question and held that though Section 21A of the Banking Regulation Act is a restraint on the power of the Court to reopen any account maintained by a bank on the ground that the rate of interest charged, in the opinion of the Court, is excessive or unreasonable, the Court can disallow such excess interest and give relief to the party, notwithstanding the provisions of Section 21 A, if it is proved that the interest charged by the Bank of loan advanced is not in conformity with the rate prescribed by the Reserve Bank of India?
7. This Court also followed the above dictum laid down by the Karnataka High Court, in Thampan v. Dhanalakshmi Bank Limited 1989 (2) Kant LT 840 (sic) holding that Section 21A of the Banking Regulation Act 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.
8. In this case the Bank contended that the loan advanced to the appellant is a short term agricultural loan exceeding Rs. 25,000/- as provided in Item 3 of Ext. A12 circular and as such the revised rate of interest is 16.5%. On the other hand the appellant contended that the loan advanced is a term loan coming within Item 6 of Ext. A12 circular and as such the Bank can claim interest only at the rate of 12.5%. The total amount sanctioned as a loan to the appellant was Rs. 75,000/-. The whole amount was available to be disbursed to the appellant even at the very beginning. But he availed himself of the above loan by receiving Rs. 25,000/- each in three instalments. The loan originally granted is one repayable within a period of twelve months. Subsequently the period of repayment of the loan was extended by mutual agreement between the parties as per Exts. A5 and A6. The subsequent extension of time granted by the Bank to facilitate repayment cannot change the character of the original loan. Therefore the loan advanced is a short term agricultural loan exceeding Rs. 25,000/- and therefore as per Ext. A12 the Bank is entitled to charge interest at the rate of 16.5%. Ext, B1 is another circular produced by the appellant. Ext. B1 also shows the rate of interest as 16.5 %.
9. Another contention pressed by the appellant is that the Bank is not entitled to claim penal interest at the rate of 12.5%. According to the appellant there was time for him to pay the amount and the Bank is not entitled to claim penal interest from the very beginning itself. But it must be remembered that the appellant could not repay the amount within a period of 12 months as originally agreed. That is why the period of repayment was extended by Exts. A5 and A6. Therefore there was clear default on the part of the appellant. Thus the Bank was entitled to claim penal interest.
10. Another point which was pressed into service by the appellant was that the Bank is not entitled to claim interest on the basis of quarterly rests. The rulings of the Karnataka High Court referred to above were the subject-matter of the decision of the Supreme Court reported in Corporation Bank v. D.S. Gowda (1994) 5 SCC 213 : (1994 AIR SCW 2721). Dealing with the question of charging of excess interest in violation of the Reserve Bank circulars and directive, the Supreme Court held as follows :
"20. The point boils down to whether interest rate of 16.5% per annum with quarterly rest on a secured loan can be said to be so excessive as to render the transaction substantially unfair ? Now, as we have pointed out earlier, the said rate of interest with the duration of the rest was prescribed and claimed consistently with the Reserve Bank directions. Having regard to the powers and functions of the Reserve Bank to which we have drawn attention, can it be said that interest rates prescribed by the Reserve Bank with the minima and maxima fixed, are unfair particularly when they have been fixed in public interest ? Can the Court have reason to so believe ? Do the facts of the case warrant a conclusion of the interest rate being excessive ? The term 'excessive' is a relative term; what may be excessive in one case may not be so in another. Much will depend on the circumstances obtaining at the material date. In our view if the Reserve Bank, keeping in view the economic scenario of the country and the impact that interest rates would have on the economy, fixes the minimum and the maximum interest rates that banks can charge on loans/advances the same cannot be termed to be unreasonable or excessive and would, in any case, amount to a 'special circumstance' within the meaning of the Explanation to Section 3(1) of the Mysore Act. In the present case the borrower did not specifically contend in his written statement that the interest charged was excessive but merely contended that the Bank was not entitled to quarterly rest and hence the claim made in the plaint on the basis was not admitted. Secondly he had shifted ground on what was the principal sum and interest which went to make the total of Rs. 5,00,000/-. Admittedly he had not paid a farthing towards the loan or interest till the date of the execution of the mortgage. This shows he was a bad pay master. The property was till under construction and did not yield any income on the date of the mortgage and so it could not be said that the security was sound. True it is that in his re-examination he came out with a statement that the property was worth Rs. 20-25 lakhs. But the value of the property at the date of the mortgage is relevant for which there is no evidence. The benefit of the rise in value will enure to the borrower but that subsequent fact cannot help in evaluating the risk factor at the date of the mortgage. Admittedly at no point of time, not even at the rime of confirmation of balance did he protest that the interest charged was excessive. He went to the length of saying : 'Even now I cannot say what is excessive interest'. That is because he never bothered to repay any part of the loan nor did he attempt to pay interest. He was totally indifferent. He led no evidence to show that the prevailing market rate was lower than the interest charged by the Bank. Nor is it shown that any other bank would have charged less. There is no mention of deposit rates etc. in his written statement or oral testimony on which the High Court has based its opinion. The learned counsel for the Bank was justified in contending that the decision of the High Court is based on no evidence since the borrower did not lead any evidence if he had done so the Bank would have led evidence to rebut the same."
11. Sri N.P. Samuel, learned counsel for the Bank brought to our notice a latest ruling of the Supreme Court on the point, reported in State Bank of India v. Yasangi Venkateswara Rao, AIR 1999 SC 896 : (1999 AIR SCW 568). In the above case the Supreme Court upheld the constitutional validity of Section 21A of the Banking Regulation Act reversing the decision of the High Court. Dealing with the above question the Supreme Court held as follows :
"7. We are unable to understand as to how the High Court could come to the conclusion that the Parliament had no jurisdiction to enact Section 21A. There can be no doubt that Section 21A deals with the question of the rate of interest which can be charged by a banking company. Entry 45 of List I of the Seventh Schedule clearly empowers the Parliament to legislate with regard to banking. The enactment of Section 21A was clearly within the domain of the Parliament. The said section applies to all types of loans which are granted by a banking company whether to an agriculturist or a non-agriculturist and therefore reference by the High Court to Entry 30 of List II was of no consequence. In our opinion, the said Section 21A had been validly enacted.
8. We also find it difficult to agree with the observation of the High Court that normally when a security is offered in the case of mortgage of property, charging of compound interest would be regarded as excessive. Entering into a mortgage is a matter of contract between the parties'. If the parties agree that in respect of the amount advanced against a mortgage compound interest will be paid, we fail to understand as to how the Court can possibly interfere and reduce the amount of interest agree to be paid on the loan so taken. The mortgaging of a property is with a view to secure the loan and has no relation whatsoever with the quantum of interest to be charged."
Applying these principles to the facts of this case, it must be held that if the parties agree that in respect of the amount advanced certain rates of interest would be paid, it may not be proper for the Court to interfere and reduce the amount of interest agreed to be paid by the parties. The Court must always give utmost respect and sanctity to the contracts entered into between the parties. The contracts entered into between the parties can be held to be illegal or void only if it is against any statutory provisions or against any public policy. When Section 21A of the Banking Regulation Act specifically states that the transactions should not be reopened by the Court on account of excessive interest, it may not be proper on the part of the Court to rewrite the contract and hold that one of the parties is entitled to avoid the contract in the matter of payment of interest. When the Supreme Court holds that Section 21A applies to all types of loans which are granted by Banks, whether to agriculturists of to non agriculturists, it is difficult to accept the argument of the appellant that only lesser interest is payable by him in this case.
12. Under these circumstances we are unable to accept the contention of the appellants. We do not find any illegality in the decree and judgment of the lower Court.
13. The appeal is therefore dismissed.