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Canara Bank Versus P.R.N. Upadhyaya & Ors.

1998 AIR 3000, 1998 (1) Suppl. SCR 93, 1998 (6) SCC 526, 1998 (5) JT 655, 1998 (4) SCALE 651 - C.A. 4286 Of 1998 - Dated:- 25-8-1998 - Anand A.S., Srinivasan M. And Rajendra Babu S., JJ. JUDGMENT: Anand A.S., Leave granted. This appeal is directed against aan award made by the Banking Ombudsman, Hyderabad, (appointed under the Banking Ombudsman Scheme, 1995) dated 26.2.1997, in a complaint filed by the respondents against the appellant bank. The appeal arises in the following circumstances: On 1 .....

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respondent no.3 executed a Demand Promissory Note undertaking to pay interest at the rate of 5% above the Reserve Bank of India rate of interest with minimum rate of interest @ 14% per annum compounded quarterly. So far as the loan granted on 21.2.1986 is concerned, respondent no.3 executed a Demand Promissory Note, undertaking to pay interest at the rate of 7.5% above the Reserve Bank of India rate of interest with minimum rate of interest @ 17.5% per annum compounded quarterly. A similar Deman .....

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interest with quarterly rests in respect of the loan of Ts. Two lacs and irrespective of the higher contractual rate of interest, the bank debited interest only at the rate of 15% per annum in view of its Head office Circular No. 379/90 and No. 90/91. Respondent Nos. 2 to 5 filed a complaint before the Banking Ombudsman in August, 1996 assailing the action of the appellant bank in charging interest at the contractual rate with quarterly rests in respect of the loans granted in the year 1980 and .....

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tice was issued to the appellant who resisted the application on various grounds. The appellant justified its action on the basis of various circulars issued by the Reserve Bank of India from time to time including the circulars dated 01.04.1981, 07.03.1994. Relying upon the judgement of this Court in State Bank of Patiala Vs. Harbans Singh (1994) 3 SCC 495, the learned Ombudsman allowed the complaint of respondent nos. 2 to 5 and directed the appellant bank to recast the two loan accounts of th .....

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pra), that interest could not be charged by the banks in respect of such loans at quarterly rests and that the appellant bank could only charge simple interest at the rate of not more than 15% in respect of the loan granted to a landlord. The learned Ombudsman with a view to give his Award had framed the following five issues: 1. Whether the grievance of the complainant regarding mode of calculation of simple interest and appropriation of creditts received can be considered: 2.Whether the grieva .....

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elieved of the necessity to deal with those three issues. Dealing with issue No.4, the learned Ombudsman opined: "As regards thee fourth Point that the bank charged interest to the loan accounts in excess of the contracted rate and that too at quarterly rests. It has faild to substantiate and establish that the interest charged in the accounts was in conformity with the Reserve Bank of India directions more specifically the R.B.I. Circular No. DBOD.NO.BL.B.C.60/22.01.0003/94 dated 17.5.1994 .....

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tion of the principles laid down by the Supreme Court in the case of State Bank of Patiala Vs. Harbans Singh (Civil Appeal No. 1690 of 1994 (arising out of SLP (C) No. 14276 of 1993). The Honourable Supreme COurt while dealing with thee question rest heldd that: "In the light of directions given bythe Reserve Bank of India which the commercial banks are bound to follow and the bank itself adopted that policy and reduced the rate of interest, the liability to pay quarterly rests is obviously .....

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rly rests and as such the action of the bank is held to be in violation of the law laid down by the Supreme Court. Consequently I hold this point also in favour of the complainant." Mr. V.R. Reddy, learned Senior counsel, appearing for the appellant bank and Mr. Harish Salve, learned Senior counse[l, appearing for the Reserve Bank of India assailed the aforesaid findings of the learned Ombudsman. Learned counsel submitted that the Reserve Bank of India had in its letter dated 13.3.1976 clea .....

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dits/overdrafts or any other financial accommodation made or provided by it or renewed by it, or discount usance bill at a race, in either case, higher than 17.5% p.a. :interest shall be charged with quarterly rests." Learned counsel also referred to the direction issued by the Reserve Bank of India dated March 7, 1976 and submitted that according to that communication, advances granted by banks to landlords for purpose of construction/renovation of premises for its use were required to be .....

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clearly indicated that in the case of loan advanced to the landlord forr construction/renovation of premises to be taken by the banks on lease/rent, the banks were entitled to charge interest at the minimum rate of 15% per annum compounded with quarterly rests. [ Learned counsel also submitted that insofar as the judgement in State Bank of Patiala Vs. Harbans Singh, (1994) 3 SCC 495, is concerned, that did not referr to, much less consider and discuss, various circulars issued by tthe Reserve Ba .....

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Scheme is obliged to regulate the working of the banks and issue directions to them to carry out the directions and circulars issued by the Reserve Bank of India under Section 21 or 35 of the Act. The view taken by the learned Ombudsman to the effect that the loans granted by the banks to their landlords for construction/renovation of premises which are taken on lease or rent by the banks cannot be termed as "term loans", as in the words of the learned Ombudsman "only those loans .....

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as "medium term loan". According to Tannan s Banking Law & Practice in India, 18th Edition the expression loan is defined as follows:- "Loans - When a banker makes an advance in a lump sum the whole of which is withdrrawn and is supposed to be repaid generally wholly at one time is called a loan. If the customer repays the same either wholly or partially and wishes to have accomodation subsequently, the latter will be treated as a separate transaction to be entered into if the .....

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the case of overdrafts and cash credits. The expression term loan has been defined in the same book as follows:- "Term Loan - Where a loan is granted for a fixed period exceeding one year and is repayable according to a schedule of repayment, as against on demand and at a time, it is known as a term loan . Where the period exceeds one year but not, say 5 to 7 years, it is commonly known as a medium-term loan; a loan with longer repayment schedule is known as long-term loan. A term loan is g .....

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charge of interest at quarterly rests applies only to "term loans" for "Commercial purposes" and not to the loans given to the landlords for construction/renovation of the premises, does not bear scrutiny. The view expressed by the learned Ombudsman was apparently influenced by the judgement of this Court in Harbans Singh s case (supra), which had negatived the plea raised on behalf of the appellant bank in that case that the word term loan would include not only the loan adv .....

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. This is explicit from the following observation of the Bench: "Though we have given sufficient time and adjourned the case from time to time to produce all the records, the bank has not chosen to produce the records; in particular, circular letter of Reserve Bank of India bearing DBOD NO.DCDC 106/c 168(61-80) dated 15.09.80 on the subject of minimum lending rates of interest in respect of advances to the landlords. Therefore, we are constrained to proceed on the basis of the material plac .....

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ligation to pay quarterly rest was not with reference to the loans taken by the landlords for construction of the premises but for commercial purpose. The word term loan was used for the commercial purpose and it did not include the loan advanced to the landlords for construction of the buildings. Term loan would mean the loan advanced for commercial purposes and not the loans given to the landlords for construction of the buildings to lease back for the use by the bank itself. It was not so int .....

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time even the lending rate of interest in favour of landlords/lessors." (Emphasis ssupplied) The judgement in Harbans Singh s case therefore, proceeded on the facts as pleaded by the parties, in the absence of relevant material, which apparently were not brought to the notice of the court. That judgement must, therefore, be considered as confined to the facts of that particular case and not to be an exposition of law based on various circular/directions and notifications issued by the Rese .....

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