Case: Corporation Bank Vs. D.S. Gowda


Decision:
0[ds]Relying on Section 3(1) of the Mysore Act the court held that the directives of the Reserve Bank of India cannot by themselves constitute a special circumstance under the Explanation to Section 3(1) and therefore since the Bank had charged compound interest as well as penal interest, there can be no doubt that a presumption arose that the transaction was substantially unfair and the burden of rebutting the presumption that the interest charged was not excessive squarely lay on the Bank which it had to discharge. The Division Bench, therefore, held that the borrower was entitled to relief and sliced down the interest rate to 12.5% per annum with annual rest. As to the levy of penal interest, the Division Bench pointed out that there was no stipulation in the agreement to support it. In regard to the service charges, it noticed that the Reserve Bank by circular datedhad directed that banks in their discretion could charge at a flat rate from January 1978 at 1/20th of 1% up to a maximum of Rs 25,000 on a once for all basis as processing fees. The Division Bench, therefore, allowed the Bank to recover Rs 25,000 by way of processing fees. In the above view, the appeal was allowed and the matter was remitted to the trial court for working out the dues in the light of the above decision. It is this decision which is assailed in Civil Appeal No. 4214 ofwas established under the Reserve Bank of India Act with effect fromand was nationalised immediately after independence in 1948. Amongst others, its functions are to act as a banker to the Government, regulate the issue of currency in India, act as a banker to other commercial banks, exercise control over the volume of credit of commercial banks to maintain price stability, to control advances granted by commercial banks and to prescribe the rates of interest on which advances may be granted. One of the ways it employs to control the volume of bank credit is through the fluctuations in the bank rate, i.e., the rate of interest at which it discounts bills of exchange from commercial banks. By the increase or decrease of the bank rate it reduces or increases the volume of credit with the commercial banks. Section 21 of the Banking Regulation Act enables the Reserve Bank to give directions to all other banks in regard to loan policies with a view to control credit facilities and curb speculative activities. This is clearly a matter of public interest. This provision authorises the Reserve Bank to give directions to other banks inter alia in regard to the rate of interest to be charged on advances/financial accommodation. The newly added Sectionrestricts the court from reopening a transaction between a banking company and its debtor on the ground that the rate of interest charged is excessive, the Usurious Loans Act or any other similar State Act, notwithstanding. If any of the directions given by the Reserve Bank are violated, apart from the punishment that can be imposed on the officers, Sectionempowers the Reserve Bank to penalise the banking company also. These, in brief, are the powers and functions of the Reservethis circular the Reserve Bank reiterates that interest on current dues in respect of agricultural advances should not be compounded. It has, therefore, advised all banking institutions to advise their branches to follow the first mentioned circular. The third circular datedis general in nature and prescribes that the rate of interest should not be more than 16.50% per annum with quarterly rests. It, however, permits recovery of penal interest in addition to normal interest even if both put together exceed the prescribedcircular makes it clear that the circular dated1976 would not apply to agricultural advances which would continue to be governed by the first two circulars dated 144. The fifth circular datedwas issued in supersession of the third circular dated1976. By this circular the maximum rate of interest prescribed under the third circular was reduced from 16.5% to 15%. In regard to compounding of interest it is directed that interest shall be charged with quarterly or longer rests. The sixth circular datedFrom the above circulars issued by the Reserve Bank from time to time it is evident that the procedure for charging interest on loans advanced to agriculturists, be theyrm loans, was different from loans advanced to other borrowers. The first and the second circulars in terms refer to charging of interest on agricultural advances. There is nothing equivocal or ambiguous about it. The third circular is general in nature and prescribes the ceiling for the recovery of interest with the qualification that if there is an agreement permitting charging of penal interest it will be permissible to charge the same for the default period in addition to the interest rate regardless of the fact that normal interest and penal interest may cross the ceiling. As the third circular was likely to raise doubts in regard to the applicability of the first and second circulars, it was clarified by the fourth circular that it (third circular) shall have no application to agricultural advances. The fifth circular superseded the third circular thereby revising the prescribed ceiling to 15% with effect fromwith quarterly or longer rests. The proviso further reduces the ceiling in case of term loans within a maturity of not less than three years. This circular is once again a general circular. The sixth circular while providing that banks can charge interest on loan accounts at quarterly or longer rests stipulates that in respect of agricultural advances banks should not compound the interest in case of current dues unless term loans have become overdue. Thus this circular draws a distinction between loanees other than agriculturists and advances made to agriculturists in the matter of charging interest. It is, therefore, quite clear that agricultural loans stand on a different footing from other loans including a loan or advance secured for construction of flats, as in the case of D.S. Gowda. So far as agricultural loans are concerned, having regard to its special characteristics and the time factor relating to the farmers capacity to meet his financial obligations, it was realised that farmers would not be in a position to pay interest at short periodical rests and if their inability to do so is visited with compounding of interest it would be too harsh and unjust on the farmers. The Reserve Bank, conscious of this difficulty of the farmers,directed the banks that their repayment period should be so fixed as to coincide with the period when the farmer is fluid and payment of interest should also be insisted upon only at the time of repayment of the loan or instalment. Further it directed that interest on current dues should not be compounded but if and when the crop loans orloans become overdue, interestoutstanding to the principal amount may be added and compounded. The procedure in regard to charging of interest onrm agricultural loans is, therefore, clearly spelt out in the first circular ofThere is no ambiguity about it. In regard to loans belonging to thecategory, the circulars dated1984, clearly state that the banks may charge interest with quarterly on (sic or) longer rests. Therefore, loans advanced for construction of flats would fall in the latter category against which interest can be charged with periodical rests. The case of respondent Kamam Ranga Rao falls in the former category since it was a loan taken for raising sugar cane crops whereas the case of the respondent D.S. Gowda falls in the latter category ofloan as it was secured for construction of flats. This position emerges on a plain reading of the relevant Reserve Bankthe above note, which by and large corresponds to Pagets opinion extracted earlier, it is evident that although there may be no common law right to charge interest on an overdraft, by universal custom of bankers a reasonable rate of interest on overdrafts is permissible. So also charging of interest with periodical rests or compounding of interest would be allowed if there is evidence of the customer having acquiesced therein, provided the relation of banker and customer is subsisting. However, if the relationship undergoes a change into that of mortgagee and mortgagor by the taking of a mortgage, the charging of interest would be governed in accordance with the terms of the mortgage. The taking of a mortgage to secure the fluctuating balance of an overdrawn account, being not inconsistent with the relationship of banker and customer, would not displace an earlier right to charge compound interest. Thus, the practice of bankers to debit the accrued interest to the borrowers current account at regular periods is a recognised practice. The circulars issued by the Reserve Bank referred to earlier are not inconsistent with this recognisedwould be so in a case where there is no agreement between the banker and the customer in regard to the payment of interest but where the loan or advance is made on certain terms reduced to writing, the parties would be governed by those terms and there would be no question of falling back on practice or custom. Besides, we have already pointed out earlier that Pagets opinion and the statement of law in para 160 of Halsbury clearly show that it has been the practice of bankers to debit accrued interest to borrowers account at regular periods, usuallyThe High Court notices that banks in India were not following a uniform practice and some banks charged interest with monthly or quarterly rests while others charged with yearly orrests and hence the Reserve Bank had to issue directives to bring about uniformity in that behalf. What is important is to realise that the normal practice was yearly orrests but shorter rests also prevailed. Secondly, the High Court was wrong in going behind the circulars/directives of the Reserve Bank on the plea that the Reserve Bank did not pay adequate attention to the question of rests or compound interest to be charged from borrowers other than agriculturists. As pointed out earlier, under the Banking Regulation Act wide powers are conferred on the Reserve Bank to enable it to exercise effective control over all banks. Sections 21 andenable it to issue directives in public interest to regulate the charging of interest on loans or advances made from time to time. It is in exercise of this power that it issued the circulars referred to earlier fixing the rates of interest to be charged from borrowers. The Corporation Bank was nationalised with effect fromSince the suit in question was filed in 1978 it was governed by the said guidelines which prescribed a minimum rate of 12.5% per annum. Any bank which committed a breach of the directives was liable to be penalised under SectionA bank could ignore the directive on pain of being penalised. Therefore, before issuing guidelines or directives the Reserve Bank must be taken to have given serious thought to the nature of directives to be issued. The Reserve Bank Governors letter datedshows that it was to bring about uniformity that the banks were advised to charge interest with quarterly rests because some banks charged interest withor yearly rests, some others charged the same on monthly or quarterly basis. It is also evident from the circulars of84 that the Reserve Bank not only provided that interest may be charged with quarterly or longer rests but also provided the maximum rate of interest that could be charged. The Reserve Bank, therefore, not only desired to bring about uniformity but also controlled the rate of interest. It is, therefore, difficult to appreciate how it can be said that no rational policy could be discerned from the aforesaid directives of the Reserveit is that while the universal banking practice is usually to charge interest withrest, there is nothing to prevent the parties from agreeing to quarterly rest and such an agreement would be perfectly valid unless it is shown to be opposed to public policy. The reason why it became necessary to enact the Usurious Loans Act, 1918, and similar State legislations was to relieve the debtor from exploitation by empowering the courts to grant relief if the interest charged is excessive rendering the transaction substantially unfair. Such laws would not have been necessary if an agreement providing for excessive rate of interest was per se violative of Section 23 of the Contract Act. Besides it is difficult to say that the Reserve Bank did not pay adequate attention to the question of rests when it is evident from the directives referred to earlier that it was the precise question of bringing about uniformity in that behalf to which the Reserve Bank addressed itself. The High Court has not put down the policy but has merely condemned it. Unless the directives laying down the said policy are declared illegal and unenforceable, banks would be bound to follow them for otherwise they would be penalised. We, however, find it difficult to agree that adequate attention to the question of rests was not paid by the Reserve(d) of that Explanation further provides that in considering whether the transaction was substantially unfair regard shall be had to the various factors set out therein. Therefore, before the court can direct reopening of the transaction it must have reason to believe that the transaction is substantially unfair as the interest charged is excessive. If compound interest is charged from an agriculturist a presumption of the transaction being unfair can arise which can be rebutted. If it is shown that the transaction in question is substantially unfair and the court must reopen the same, the question may arise whether the newly added Sectionto the Banking Regulation Act bars such an enquiry. It may be mentioned that this provision was inserted after the High Courts judgment and, therefore, the view of the High Court on this point is not available. It may also have to be considered if Section 21 A would apply to pending proceedings like the presentHigh Court then held that there was no warrant for charging interest with monthly as well as quarterly rests. The High Court examined the interest rates on deposits as well as the bank rates and concluded that the reasonable rate would be 12.5% per annum with annual rests. Penal interest was refused on the ground that thedid not provide forhe had not paid a earthing 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 still 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 hishe came out with a statement that the property was worth Rslakhs. 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 theat no point of time, not even at the time 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 and if he had done so the Bank would have led evidence to rebut the same.The second limb of the argument was that the provisions of Usurious Loans Act would have no application as fixation of rates of interest is governed by the special law, namely, Banking Regulation Act which must prevail over the former. To put the matter beyond the pale of doubt Sectioncame to be introduced in the Banking Regulation Act to clarify that the provisions of the Usurious Loans Act would have no application to transactions between a banking company and its debtor on the plea that the rate of interest charged is excessive. It is not necessary for us to go into the question whether the provisions of the Banking Regulation Act would prevail or whether the newly added Sectionwould apply to pending cases as on the facts stated hereinbefore we are satisfied that the High Court fell into an error in holding that the rate of interest on the mortgage in question was excessive.22. Insofar as Civil Appeal No. 544 of 1986 is concerned it relates to the Banks right to charge compound interest i.e. interest with periodical rests on agricultural advances. We have already referred to the various circulars issued by the Reserve Bank from time to time in exercise of power conferred by Sectionof the Banking Regulation Act. We have pointed out that the said circulars/directives provide that agricultural advances should not be treated on a par with commercial loans insofar as the rate of interest thereon is concerned because the farmers do not have any regular source of income except sale proceeds of their crops which income they get once a year. The question of recovery of interest with quarterly orrests from farmers is, therefore, not feasible. The fact that the farmers are fluid at a given point of time every year has to be kept in mind in determining the point of time when they should be expected to repay the loan or pay the instalment/interest on advances. Therefore, to allow the banks to charge interest on quarterly orrests from farmers would tantamount to virtually compelling them to pay compound interest, since they would not be able to pay the interest except once in a year i.e. when they receive the income from sale proceeds of their crops. The Reserve Bank has shown concern for the farmers by directing all banking institutions to so regulate the recovery of interest as to coincide with the point of time when the farmers are fluid. It has, therefore, been emphasised by the Reserve Bank that interest should be charged once a year to coincide with the point of time when the farmer is fluid and interest on current dues should not be compounded although it may be done when the advance/instalment becomes overdue. Thus according to the circulars/directives, so far as loans for agricultural purposes are concerned, at best interest may be charged with yearly rests and may be compounded if the loan/instalment becomes overdue. In the present case, since interest was charged withrests that was clearly in contravention of the Reserve Bank circulars/directives. Compounding of interest on current dues on agricultural advances having been discouraged, the Bank was not entitled to charge interest with shorter periodical rests and compound the same. The Bank could add interest outstanding to the principal and compound the interest when the crop loan or term loan becomes overdue having regard to the tenor of the circular datedThe High Court was, therefore, fully justified in coming to the conclusion that the Bank was not entitled to charge interest with halfe are in respectful agreement with the above interpretation placed on Sectionof the Banking Regulation Act. We must, however, clarify that we should not be understood to be expressing any opinion whatsoever on the question whether Sectionwould debar the courts from interfering if the circulars/directives issued by the Reserve Bank do not fix the maxima and leave it to the discretion of the banks to determine the rate of interest above the minimum fixed. To put it differently if under the Reserve Bank circulars/directives the minimum rate of interest is fixed, say 12.5% without a ceiling, leaving it to the discretion of each bank to fix a higher rate of interest at its sweet will above 12.5%, a question may arise whether the interest fixed by the bank is excessive and unconscionable and whether in such situation Section 21A would debar the court from reducing the rate of interest to a reasonable limit. We do not express any opinion on this question as the same does not arise in the present case. But if the Reserve Bank has fixed the maximum rate of interest in exercise of the powers conferred by Sectionsof the Banking Regulation Act, Section 21A would be attracted and the transaction would not be liable to be reopened on the ground that the rate of interest fixed is excessive even though not exceeding the ceiling determined by the Reserve Bank. In the case of agricultural loans/advances the position has been made amply clear by the circulars referred to earlier which do not permit banks to charge compound interest with quarterly rests. In such cases as observed earlier the interest can be fixed with annual rests coinciding with the time when the farmer is fluid and if thereafter the farmer fails to pay the interest it would be open to compound the interest on the crop loan or instalments upon the term loans becoming overdue.