IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE P.R.RAMAN & THE HONOURABLE MR. JUSTICE P.BHAVADASAN WEDNESDAY, THE 19TH AUGUST 2009 / 28TH SRAVANA 1931 RFA.No. 324 of 2008() --------------------- OS.408/2000 of II ADDL.SUB COURT,ERNAKULAM .................... APPELLANT/4TH DEFENDANT ------------- K.B.KANNAN, AGED 41 YEARS, S/O.(LATE) K.K.BALAN, R/AT KELAMANGALATH HOUSE, SRM ROAD, COCHIN-18. BY ADV. SMT.G.VIDYA RESPONDENT(S): PLAINTIFF AND DEFENDANTS 1-3 & 5 ------------------ 1. THE CATHOLIC SYRIAN BANK LTD., REGISTERED OFFICE AT TRICHUR AND BRANCH AT MARKET ROAD, ERNAKULAM, REPRESENTED BY ITS BRANCH MANAGER. 2. M/S.KRISHNA OIL MILLS, BASIN ROAD, ERNAKULAM, REPRESENTED BY ITS MANAGING PARTNER. 3. KUNJUMANI, W/O.K.K.KRISHNAN, PARTNER, M/S.KRISHNA OIL MILLS, BASIN ROAD, ERNAKULAM, R/AT KELAMANGALATH HOUSE, SRM ROAD, COCHIN-18. 4. SUMANGALA, W/O.K.K.BALAN, PARTNER, M/S.KRISHNA OIL MILLS, BASIN ROAD, ERNAKULAM, R/AT KELAMANGALATH HOUSE, SRM ROAD, COCHIN-18. 5. K.B.DHANAPALAN, S/O.K.K.BALAN, R/AT KELAMANGALATH HOUSE, SRM ROAD, COCHIN-18. BY ADV. SRI.C.A.JOY,SC,CATHOLIC SYRIAN BANK LTD FOR R1 BY ADV. SRI.RAJESH MATHEW FOR R2 TO 5 THIS REGULAR FIRST APPEAL HAVING BEEN FINALLY HEARD ON 19/08/2009, ALONG WITH RFA NO. 326 OF 2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: P.R.RAMAN & P.BHAVADASAN, JJ. ------------------------------- R.F.A.Nos. 324 & 326 of 2008 ------------------------------- Dated this the 19th August, 2009 J U D G M E N T Bhavadasan, J. Fourth defendant in O.S.No.408 of 2000 and O.S.No.407 of 2000, on the file of the Additional Sub Court, Ernakulam, respectively is the appellant in both R.F.A.Nos.324 and 326 of 2008. The suits were for money. Parties and facts are herein after referred to as available before the court below. 2. O.S.No.407 of 2000 was instituted by the Bank on the basis of overdraft facility sanctioned to the first defendant, M/s.K.K.Krishnan & Sons and second defendant Kunjumani Krishnan also availed the facility on 6.8.2007. An equitable mortgage was created as a security for the overdraft facility, and 6.250 cents of land owned by the 4th defendant was mortgaged. Thereafter, defendants 1 and 2 exceeded the limits of overdraft and violated the terms of the agreement. Hence the RFA.Nos.324 & 326 of 2008 2 bank instituted the suit. The suit was decreed ex party allowing the plaintiff bank to recover Rs.5,53,700/= with interest at 23% with quarterly rests from the date of suit. 3. In O.S.No. 408 of 2000, the facts of which are similar to O.S.No.407 of 2007, the suit was decreed ex parte allowing the plaintiff bank to recover Rs.4,61,510/= with interest at the rate of 23% with quarterly rests from the date of suit. 4. At the time of hearing, it is pointed out that an amount of Rs.4,61,510/= which the decreed amount in O.S.No.408 of 2000 was paid on 27.9.2008 and that the decreed amount of Rs.5,53,700/= in O.S.No.407 of 2000 was also paid in two instalments on 10.9.2008 and 29.9.2008. However, it is further contended that the interest awarded at the rate of 23% on both the suits is on higher side, especially in view of the fact that the decreed amounts have already been paid, and hence prayed that interest awarded at the rate of 23% may be set aside. RFA.Nos.324 & 326 of 2008 3 5. On hearing both sides, we directed the Bank to file a statement for the amount due as on date in each of the cases. The Bank filed its statements on 10.8.2009 which show that in O.S.No.408 of 2000, the balance due as on that date is Rs.25,23,996.93; and the balance amount due in O.S.No.407 of 2000 as on that date is Rs.29,76,484.02. It may be seen that decree amount has already been paid and the balance amounts include the interest portion only. 6. The learned counsel appearing for the appellant in both the cases relied on the decision reported in Central Bank of India v. Ravindra and others (AIR 2001 SC 3095). Paragraph 55 of the said case reads as follows:- “55. During the course of hearing it was brought to our notice that in view of several Usury Laws and Debt Relief Laws in force in several States private money- lending has almost come to an end and needy borrowers by and large depend on banking institutions for financial facilities. Several unhealthy practices having slowly penetrated into prevalence were pointed out. Banking is an organised institution and most of the banks press into service RFA.Nos.324 & 326 of 2008 4 long running documents wherein the borrowers fill in the blanks, at times without caring to read what has been provided therein, and bind themselves by the stipulations articulated by best of legal brains. Borrowers other than those belonging to corporate sector, find themselves having unwittingly fallen into a trap and rendered themselves liable and obliged to pay interest the quantum whereof may at the end prove to be ruinous. At times the interest charged and capitalised in manifold than the amount actually advanced. Rule of damdupat does not apply. Penal interest, service charges and other over-heads are debited in the account of the borrower and capitalised of which debits the borrower may not even be aware. If the practice of charging interest on quarterly rests is upheld and given a judicial recognition, unscrupulous banks may resort to charging interest even on monthly rests and capitalising the same. Statements of Accounts supplied by banks to borrowers many a times do not contain particulars or details of debit entries and when written in hand are worse than medical prescriptions putting to test the eyes and wits of the borrowers. Instances of unscrupulous, unfair and unhealthy dealings can be multiplied though they cannot be generalised. Suffice it to observe that such issues shall have to be left open to be adjudicated upon in appropriate cases and and when actually arising for decision and we cannot venture into laying down RFA.Nos.324 & 326 of 2008 5 law on such issues as do not arise for determination before us. However, we propose to place on record a few incidental observations, without which, we feel, out answer will not be complete and that we do as under:- (1) Though interest can be capitalised on the analogy that the interest falling due on the accrued date and remaining upaid, par-takes the character of amount advanced on that date, yet penal interest, which is charged by way of penalty for non-payment, cannot be capitalised. Further interest, i.e., interest on interest, whether simple, compound or penal, cannot be claimed on the amount of penal interest. Penal interest cannot be capitalised. It will be opposed to public policy. (2) Novation, that is, a debtor entering into a fresh agreement with creditor undertaking payment of previously borrowed principal amount coupled with interest by treating the sum total as principal, and contract express or implied and an express acknowledgment of accounts are best evidence of capitalisation. Acquiescence in the method of accounting adopted by the creditor and brought to the knowledge of the debtor may also enable interest being converted into principal. A mere failure to protest is not acquiescence. RFA.Nos.324 & 326 of 2008 6 (3) The prevalence of banking practice legitimatises stipulations as to interest on periodical rests and their capitalisation being incorporated in contracts. Such stipulations incorporated in contracts voluntarily entered into and binding on the parties shall govern the substantive rights and obligations of the parties as to recovery and payment of interest. (4) Capitalisation method is founded on the principle that the borrower failed to make payment though he could have made and thereby rendered himself a defaulter. To hold an amount debited to the account of the borrower capitalised it should appear that the borrower had an opportunity of making the payment on the date of entry or within a reasonable time or period of grace from the date of debit entry or the amount falling due and thereby avoiding capitalisation. Any debit entry in the account of the borrower and claimied to have been capitalised so as to form an amalgam of the principal sum may be excluded on being shown to the satisfaction of the Court that such debit entry was not brought to the notice of the borrower and/or he did not have the opportunity of making payment before capitalisation and thereby excluding its capitalisation. (5) The power conferred by Sections 21 and 35-A of the Banking Regulation Act, RFA.Nos.324 & 326 of 2008 7 1935 is coupled with duty to act. Reserve Bank of India is prime banking institution of the country entrusted with a supervisory role over banking and conferred with the authority of issuing binding directions, having statutory force, in the interest of public in general and preventing banking affairs from deterioration and prejudice as also to secure the proper management of any banking company generally. Reserve Bank of India is one of the watchdogs of finance and economy of the nation. It is, and it ought to be, aware of all relevant factors, including credit conditions as prevailing, which would invite its police decisions. RBI has been issuing directions/circulars from time to time which, inter alia, deal with rate of interest which can be charged and the periods at the end of which rests can be struck down, interest calculated thereon and charged and capitalised. It should continue to issue such directives. Its circulars shall bind those who fall within the net of such directives. For such transaction which are not squarely governed by such circulars, the RBI directives may be treated as standards for the purpose of deciding whether the interest charged is excessive, usurious or opposed to public policy. (6) Agricultural borrowings are to be treated on a pedestal different from others. Charging and capitalisation of interest on agricultural loans cannot be RFA.Nos.324 & 326 of 2008 8 permitted in India except on annual or six monthly rests depending on the rotation of crops in the area to which the agriculturist borrowers belong. (7) Any interest charged and/or capitalised in violation of RBI directives, as to rate or interest, or as to periods at which rests can be arrived at, shall be disallowed and/or excluded from capital sum and be treated only as interest and dealt with accordingly. (8) Award of interest pendente lite and post-decree is discretionary with the Court as it is essentially governed by Section 34 of the CPC dehors the contract between the parties. In a given case if the Court finds that in the principal sum adjudged on the date of the suits the component of interest is disproportionate with the component of the principal sum actually advanced the Court may exercise its discretion in awarding interest pendente lite and post-decree interest at a lower rate or may even decline awarding such interest. The discretion shall be exercised fairly, judiciously and for reasons and not in an arbitrary or fanciful manner.” 7. On going through the above decision and the decree and the statement filed by the Bank, there can be no RFA.Nos.324 & 326 of 2008 9 doubt that principle laid down in the decision apply to the case on hand. 8. Considering the factual situation and in the interest of justice, we direct the appellants to pay simple interest at the rate of 12% from the date of decree till the date of payment of amounts which have already been made. On that basis, we direct the appellants to deposit a sum of Rs.7 lakhs within a period of three weeks from today in full and final satisfaction of the decree debts, in both the suits. If the amount is deposited within the time stipulated, both the decrees shall stand satisfied. On default of payment, as stated above, the decree in both the suits shall stand confirmed. The appeals are disposed of as above. P.R.RAMAN, JUDGE P.BHAVADASAN , JUDGE. nj.