1998 (8) TMI 626 - SC - Indian Laws

Summary

Issues Involved:
1. Mode of calculation of simple interest and appropriation of credits received.
2. Reopening of the charging of interest considering Section 21A of the Banking Regulation Act.
3. Justification of the bank in charging interest over and above the contractual rate.
4. Charging of interest on a quarterly compounding basis.

Detailed Analysis:

Issue 1: Mode of Calculation of Simple Interest and Appropriation of Credits Received
The judgment did not address this issue as there was no controversy raised before the Supreme Court regarding it.

Issue 2: Reopening of the Charging of Interest Considering Section 21A of the Banking Regulation Act
Similarly, this issue was not addressed by the Supreme Court due to the absence of controversy.

Issue 3: Justification of the Bank in Charging Interest Over and Above the Contractual Rate
The Banking Ombudsman concluded that the appellant bank failed to substantiate that the interest charged was in conformity with the Reserve Bank of India (RBI) directions, specifically RBI Circular No. DBOD.NO.BL.B.C.60/22.01.0003/94 dated 17.5.1994. According to this circular, the bank could charge interest only at the rate contracted at the time of loan sanction and was not entitled to vary the rate of interest for term loans. The Ombudsman held this point in favor of the complainant.

Issue 4: Charging of Interest on a Quarterly Compounding Basis
The Ombudsman observed that charging interest at quarterly rests was a violation of the principles laid down by the Supreme Court in the case of State Bank of Patiala Vs. Harbans Singh. The Supreme Court had held that in light of RBI directions, the liability to pay quarterly rests was illegal, and the bank could only charge simple interest at a rate not exceeding 15% per annum. Consequently, the Ombudsman held this point in favor of the complainant as well.

Arguments by Appellant Bank and Reserve Bank of India:
The appellant bank and the Reserve Bank of India (RBI) argued that the RBI's letter dated 13.3.1976 allowed scheduled banks to charge interest with quarterly rests. They emphasized that loans granted to landlords for construction/renovation of premises leased to banks should be treated as "Term Loans" and charged interest accordingly, as clarified by various RBI circulars, including those dated March 13, 1976, April 1, 1991, and April 18, 1991. They contended that the judgment in State Bank of Patiala Vs. Harbans Singh did not consider these circulars, which have statutory force.

Supreme Court's Analysis:
The Supreme Court noted that the circulars issued by the RBI under Sections 21 and 35 of the Banking Regulation Act are statutory and must be complied with by banks. The Ombudsman's interpretation that loans to landlords for construction/renovation of premises leased to banks could not be termed "term loans" was erroneous. The term "term loan" is well understood in banking parlance as a loan for a fixed term, irrespective of its purpose.

The Supreme Court observed that the judgment in Harbans Singh's case was based on incomplete material and did not consider relevant RBI circulars. Therefore, it should be confined to its specific facts and not be seen as an exposition of law regarding the meaning of "term loan" or the charging of interest with quarterly rests.

Conclusion:
The Supreme Court set aside the Ombudsman's award dated 26.2.1997 and remitted the complaint for fresh disposal in light of the RBI's circulars and directions regarding the charging of interest from landlords whose buildings are leased by banks. The Ombudsman is required to consider these circulars and provide the parties an opportunity to present their views.

Disposition:
The appeal was allowed, and the complaint was remanded to the Banking Ombudsman, Hyderabad, for fresh disposal. No costs were awarded.