Case: Corporation Bank Vs. D.S. Gowda

These questions which have a bearing on the day to day transactions of loan/advance entered into by the banks arise in the following background.2. In Bank of India v. Rao Saheb Krishna Rao Desai, the Bank had advanced a loan for purchasing a tractor to improve the agricultural land. The borrower executed a promissory note as also a hypothecation deed whereby he agreed to repay the said sum on demand with interest at 4.5% per annum over the Reserve Bank rate, minimum being 9.5% per annum with quarterly rests. The original rate fixed was 10.5% per annum. On the failure of the borrower to adhere to the terms of the loan, the Bank instituted a suit for recovery of the loan wherein it claimed compound interest on the strength of the term with quarterly rests. The suit was decreed by the trial court with future interest at 10.5% per annum. The claim for compound interest was rejected. Feeling aggrieved, the Bank preferred the aforesaid appeal which was heard by a Division Bench of the Karnataka High Court.The Division Bench referred to Pagets Law of Banking, 8th Edn. (1972), Chapter V, wherein under the caption interest it was stated :"There is no common law right to charge even simple interest on an overdraft but the claim could be supported on the ground of universal custom of bankers or on the basis of implied agreement. Where the customer has acquiesced in the system under which the interest is charged, that also would justify the claim. Such acquiescence will justify the charging compound interest or interest with periodical rests, so long as the relation of banker and customer exists, and the relationship is not changed into that of mortgagee and mortgagor. The taking of a mortgage or a charge by way of legal mortgage to secure the fluctuating balance of an account is not, however, inconsistent with the relation of banker and customer so as to preclude compound interest. The effect of the practice of bankers in debiting interest to an overdrawn current account periodically and thereby increasing the capital sum was considered in Yourell v. Hibernian Bank in which Lord Atkinson said :`The Bank, by taking the account with theserests,secured for itself the benefit of compound interest. This is a usual and perfectly legitimate mode of dealing between banker and customer. "In Holder v. IRC the Court of Appeal approved the statement of Lord Cowan in Reddie v. Williamson"that the periodical interest at the end of each year is a debt to be then paid, and which mustto have been paid when placed to the debit of the account as an additional advance by the bank for the convenience of the obligations."Relying on the above passage, the Division Bench observed that the custom of charging compound interest by banks would be normally applicable in the matter of overdraft facilities only and that too, when there exists relationship of banker and customer, which relationship has not been transformed into that of mortgagee and mortgagor. Sabhahit, J., speaking for the Bench, observed :"Compound interest or the practice of quarterly orrest is something strange to agricultural financing where the loans are eitherm financing is done for growing the annual crops. They are termed as crop loans.financing is done for improvements in the lands and the period would be about three years to five years.financing is given for clearing off of old debts and for theinvestments. That being so, in agricultural financing, the question of the normal commercial banking conditions as in overdrafts would not come into play and the bank custom and habits which are usual in the case of commercial banking cannot be smuggled into agricultural financing."3. On facts, the court found that the parties understood, if at all, quarterly rest to mean that interest is to be paid every quarter and nothing more. It was also noticed that the loan advanced was in fact a mortgage transaction and therefore the usual practice and custom prevailing in the case of overdrafts would have no application. The court, therefore, held that the clause quarterly rests used in the printed form was never intended to burden the borrower with the obligation to pay compound interest. Hence the Division Bench held that the clause which was noted by the parties at its inception and execution to permit the Bank to recover compound interest must be deemed to be void in the eye of law and cannot be allowed to be enforced by the Bank. We have referred to this decision even before we refer to the decisions impugned in these appeals as it has a direct bearing on the subsequent decisions.4. The decision of the Division Bench of the Karnataka High Court impugned in Civil Appeal No. 4214 of 1982 is reported as D.S. Gowda v. Corporation Bank. D.S. Gowda who was allotted a building site by the Bangalore Development Authority, had approached the Bank for financial help to construct residential flats on the said site. The Bank acceded to his request and granted overdraft facility up to Rs 2,50,000. The borrower accepted the facility and commenced construction at the site. However, it was soon realised that the sanctioned facility was insufficient and so he approached the Bank for additional finance. Since he had failed to pay interest/installments his financial indebtedness had risen. Onhe executed an irrevocable Power of Attorney authorising the Bank Manager to supervise and/or to put up construction according to the sanctioned plan and to induct tenants and recover rents from them in repayment of the loan and interest due to the Bank. Unfortunately for him, the building could not be completed and by 1975 the outstanding loan and interest had swollen to over Rs 4 lakhs. The Bank then felt the need for adequate security whereupon onthe borrower executed a deed of equitable mortgage by deposit of title deeds for Rs 5 lakhs. The Bank gave him further accommodation on the execution of the said document. Under the terms of the mortgage, the borrower covenanted to repay the mortgage loan of Rs 5 lakhs with interest at 16.5% per annum subject to such rate of interest as may be prescribed within a period of two years. It was further agreed by the mortgagor that he will pay interest on the mortgage amount at the end of each calendar month without default and in the event of default, overdue interest may be charged. Onhe at the instance of the Bank executed a promissory note by way of collateral security undertaking to pay Rs 5 lakhs with interest at 16.5% per annum with quarterly rests. Bythe amount payable with penal interest, service charges, etc., stood at Rs 7,56,934.17 paise. The Bank instituted a suit for recovering the said amount with future interest and costs by the sale of mortgaged property under Order XXXIV of the Code of Civil Procedure. The borrower admitted the execution of the equitable mortgage deed and the promissory note, but contended that the promissory note was executed as a collateral security and the provision of quarterly rest provided therein was not one of the conditions of the loan granted to him. He further contended that the amount actually borrowed under the mortgage was Rs 4 lakhs but the Bank got the mortgage deed executed for Rs 5 lakhs by including the interest due on Rs 4 lakhs. He, therefore, contended that he was not liable to pay compound interest or penal interest since such a liability did not arise under the loan transaction. In any event he contended that the interest charged was exorbitant, the transaction was substantially unfair and, therefore, he was entitled to relief under the provisions of the Mysore Act.Next is the case of H.P. Krishna Reddy v. Canara Bank. The facts of the case show that the suit filed by the Bank for recovery of money due under an equitable mortgage and promissory note was contested mainly on the ground that the Banks claim to interest at the rate of 13% per annum with quarterly rest was unsustainable. That claim was laid on the rules of business, trade, usage and custom. This claim was based on a circular of the Reserve Bank datedwhich in turn referred to an earlier circular ofBy the time this decision was rendered Sectionwas introduced in the Banking Regulation Act, 1949 which reads as follows :Rates of interest charged by Banking Companies not to be subject to scrutiny by Court.Notwithstanding anything contained in the Usurious Loans Act, 1918, or any other law related 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 came to the conclusion that the loan in question was for agricultural purposes and, therefore, under the Reserve Banks circulars the Bank was precluded from recovering interest with quarterlythe question whether the contractual rate of 13% was excessive, the Division Bench ruled against the borrower. However, on the question of applicability of Sectionit observed that the said provision had no bearing on the question of courts jurisdiction to give relief to an aggrieved party if the bank in any particular case has charged interest in excess of the limits prescribed by the Reserve Bank, since that would render the bank liable to penalty under the Banking Regulation Act. Therefore, it was observed that if in any case it is shown that the bank had charged interest in disobedience of the Reserve Bank directive, the court would be justified in granting relief to the borrower notwithstanding Sectionextracted earlier. As regards the grant of interest pendente life, the rate of interest at 6% per annum was justified in view of the constraints of Explanations 1 and 2 to proviso to Section 34 of the Civil Procedure Code since the loan was admittedly for agricultural purposes. We have referred to this decision at this stage to indicate the trend of the said High Court.7. The judgment impugned in Civil Appeal No. 544 of 1986 has been reported as Bank of India v. Kamam Ranga Rao. The said matter arises out of the suit instituted by the Bank for recovery of Rs 30,564, (principal sum being Rs 10,000) borrowed for raising sugar cane crop. Under the documents executed by and between the parties the borrowers were liable to pay interest at the rate of 4% above the rate prescribed by the Reserve Bank subject to a minimum of 13% per annum with quarterly rests. The Bank, however, had charged onlyrests and had claimed at the same rate in the suit. The borrowers while admitting the fact of having taken the loan denied their liability to pay interest with quarterly rests on the ground that the loan was for agricultural purposes and it was settled practice that the Bank should not charge interest with periodical rests i.e. compound interest. The trial court held that it was well settled that for agricultural loans in India charging of compound interest was not permissible. The Bank was, therefore, directed to submit a revised statement which it did determining the dues at Rs 19,851.66. The trial court decreed the suit for the said amount with future interest at 6% per annum. Feeling aggrieved by the said decree the Bank approached the High Court in appeal. Since the question raised in appeal related to the Banks right to charge compound interest on agricultural advances and since in a number of matters pending before the court the same question was involved, the court thought it advisable to issue notice under Order 1 Rule 8 of the Code of Civil Procedure as also to the Reserve Bank of India with a direction to inspect the accounts and submit a report. Accordingly the report came to be submitted onThat report disclosed that the Bank had debited interest to the crop loan account thrice withrest before the due date of payment of the loan and had also compounded the interest. The Division Bench observed as under :"The Bank, however, could add interest outstanding to the principal and compound the interest when the crop loan becomes overdue keeping in view what has been stated in the circular datedAs such the Bank compounding of interest atintervals after the loan amount has become overdue cannot be questioned."Reference was made to as many as six circulars issued by the Reserve Bank between4. The Division Bench held that banks were 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 in excess of the prescribed limit would be illegal and void. Following its earlier decisions it was further held that banks could not charge interest with quarterly rests on agricultural advances. It was pointed out that agricultural advances could not be equated with commercial loans in the matter of compounding of interest. In the case of agricultural loans it was pointed out that since farmers did not have any regular source of income other than the sale proceeds of their crops, they received income once in a year and were, therefore, not in a position to pay interest at fixed rests and hence in such transactions the parties could never be taken to have intended that the interest should be compounded quarterly orOn the question of applicability of Sectionof the Banking Regulation Act it was said that unless it is proved that the interest charged by the banks is not in conformity with the rates prescribed by the Reserve Bank, the court would be precluded from reopening the transaction. However, if the rate charged is in violation of the Reserve Banks circular, the excess rate of interest can be chopped off as illegal and void. On this line of reasoning the Banks appeal was dismissed.8. At this stage it would be convenient to notice two decisions of the Andhra Pradesh High Court which have a bearing on some of the points under consideration. In K. C. Venkateswarlu v. Syndicate Bank", the Division Bench held that the newly added Sectionof the Banking Regulation Act made the provisions of the Usurious Loans Act, 1918, inapplicable to a transaction of loan between a bank and a borrower. The Division Bench recorded its conclusion in paragraph 5 of the judgment thus :"It is clear that the said provision makes the provisions of Usurious Loans Act inapplicable to any transaction between a banking company and its debtor. The courts power to reopen the transaction under the provisions of the Usurious Loans Act on the ground that the rate of interest charged is excessive is no longer available. It is not disputed that it affects the pending proceedings also though the Act came into force onThus it is clear that the Usurious Loans Act is no longer applicable to any debt due to a banking company."It is important to note that it was not disputed before the court that restriction imposed on the courts power by Sectionextended to pending proceedings as well.9. In State Bank of India, Eluru, Re9, a learned Single Judge of the said High Court, however, held that Section 21A cannot have overriding effect over the Usurious Loans Act, 1918, as amended by the Madras Amendment Act No. VIII of 1937, in its application to agriculturists. According to the Learned Judge, the use of the generic word debtor in Sectionwas not intended to refer to agriculturists. The learned Judge also held Sectionultra vires the power of Parliament on the ground that it was not a law relating to banking but was intended to deny relief to agriculturists from indebtedness which was beyond the legislative competence of Parliament. He felt that the said provision could not be saved by the application of even the pith and substance doctrine. Further, the learned Judge found Sectionultra vires Article 14 on the plea that a law which requires or compels courts to implement harsh, unequal and unconscionable transactions providing for payment of compound interest or usurious rates of interest by depriving the debtors of their right to claim relief under the provisions of the Usurious Loans Act or similar State laws would offend Article 14 inasmuch as it permits discrimination against hapless debtors. Holding that the provision of Sectionwas arbitrary, partisan and offensive to our sense of equity and equality, the learned Judge refused to apply it in the facts of the case. It may, however, be mentioned that the attention of the learned Single Judge was not invited to the Division Bench decision in the case of Venkateswarlu which was rendered only a few days before. However, in the appeals before us neither Parliaments competence to enact Section 21A nor its constitutional validity based on Article 14 has been challenged. We are, therefore, not required to go into these questions.

Reasoning:
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.