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Judgment
Petitioners in these writ petitions are agriculturists. They availed agricultural loan from the first respondent Co-operative Bank. According to Mr.
N.V. Srinivasan, learned counsel for the petitioners, out of the total loan amount availed by the petitioners namely, Rs. 2,12,000/- Rs. 2,12,000/-,
Rs. 2,12,000/- Rs. 1,87,000/-, Rs. 1,71,500/-& Rs.1,05,000/- respectively, the petitioners have paid so far Rs.1,56,000/-, Rs. 2,76,880/-, Rs.
2,56,500/-, Rs. 2,21,950/-, Rs. 2,47,769/- & Rs.80,000/-respectively. However, the first respondent has demanded a sum of Rs. 2,66,332/-,
Rs. 1,99,556/-, Rs. 4,02,850/-, Rs. 2,78,191/-, Rs. 70,600/- & Rs. 32,000/- from the respective petitioners and also initiated recovery
proceedings. Complaining that the first respondent is arbitrarily levying compound and penal interest on the amount due, placing reliance on the
ratio laid down by the Apex Court in Central Bank of India Vs. Ravindra and Others, , the petitioners seek a Writ of Mandamus declaring the
action of the respondents in imposing penal interestand compounding of interest as illegal, null and void and to reconstruct the loan account by
waiving compounding of interest and penal interest and to drop all further proceedings against the petitioners and direct the first respondent to
comply with the directions issued by the RBI in agricultural loans and one time settlement of a Government of Tamil Nadu.
Mr. N.V. Srinivasan, learned counsel for the petitioners also contends that the petitioners having already paid 25% of the dues and therefore,
they are not liable to pay penal interest as per G.O.D. No. 121. It is also complained that the respondent Bank is levying penal interest on day-
today basis.
Learned counsel for the respondents is not disputing the fact that the ratio laid down by the Honourable Supreme Court of India in Central Bank
of India Vs. Ravindra and Others, is applicable to the facts of this case.
The Apex Court in Central Bank of India Vs. Ravindra and Others, held as follows:
....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 as and when actually arising for decision and we cannot venture
into laying down 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, our 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 unpaid, partakes 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, any 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.
(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 claimed 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, 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 policy 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 borrowing are to be treated on a pedestal different from others. Charging and capitalisation of interest on agricultural loans cannot
be 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 of interest, or as to periods at which rests can be arrived at,
shall be disallowed and/or excluded from capital sum and 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 suit, 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.
In view of the law having been settled with this judgment, it is expected henceforth from the banks, bound by the directives of the Reserve
Bank of India, to make an averment in the plaint that interest/compound interest has been charged at such rates, and capitalised at such periodical
rests, as are permitted by, and do not run counter to, the directives of the Reserve Bank of India. A statement of account shall be filed in Court
showing details and giving particulars of debit entries, and if debit entry relates to interest then setting out also the rate of, and the period for which,
the interest has been charged. On the Court being prima facie satisfied, if a dispute is raised in that regard, of the permissibility of debits, the onus
would be on the borrower to show why the amount of debit balance appearing at the foot of the account and claimed as principal sum cannot be
so accepted and adjudged. This practice would narrow down the scope of controversy in suits filed by banking institutions and enable an
expeditious disposal of the suits, the issues wherein are by and large capable of being determined by documentary evidence. RBI directives have
not only statutory flavor, any contravention thereof or any default in compliance therewith is punishable under sub-section (4) of Section 46 of
Banking Regulation Act, 1949. The Court can act on assumption that transactions or dealings have taken place and accounts maintained by banks
in conformity with RBI directives.
If that be so, suffice it to direct the 2nd respondent to appoint an auditor to look into the affairs of the first respondent Bank and to find out as to
whether the rate of interest demanded and collected is in compliance with the ratio laid down by the Apex Court in Central Bank of India V.
Ravindra (referred supra). If the auditor finds that the rate of interest collected from the petitioners based on daily, monthly or quarterly rests,
instead of half-yearly or annual rests, then the second respondent pass appropriate direction to set aside the penal interest collected from the
petitioners and direct the first respondent to work out the actual arrears to be paid by the petitioners and inform the same to the petitioners within
three months from the date of receipt of this order for settlement of the same and till then, the respondents shall not take any coercive steps against
the petitioners towards the alleged dues from the petitioners. The writ petitions are ordered accordingly. No costs. Consequently, connected
W.P.M.P.s are closed.