United Commercial Bank vs Karumanchi Aruna Kumari and Others

Krishna Saran Shrivastav, J.—The plaintiff in O.S. No. 74 of 1979 on the file of the Subordinate Judge at Bapatla is the appellant in this appeal.

The facts of the case lie in a very small compass. The plaintiff-Bank on 1-10-1975 advanced to the defendant No. 1 a sum of Rs. 23,000/-on interest at the rate of 4% above the Reserve Bank of India rate subject to a minimum of 13% with half yearly rests. The defendants No. 2 and 3 stood as guarantors. The loan was granted for agricultural purposes to defendant No. 1 who is an agriculturist. He did not pay the loan amount and interest amounting to Rs. 32,615-70 paise, therefore, the plaintiff sued the defendants. The defendants resisted the suit mainly on the ground that the plaintiff-Bank is not entitled to claim interest at the rate of 13% per annum with half yearly rests. They are agriculturists within the meaning of the Andhra Pradesh Agriculturists Relief Act, 1938 (Act IV of 1938) and, therefore, the suit debt is liable to be scaled down. The plaintiff is also not entitled to claim costs of the suit.

The learned trial Court decided the follow ing two issues only as the parties to the suit restricted their arguments so far as the question of interest was concerned:

(1) Whether the interest claimed by the plaintiff is not usurious?

(2) What is the amount due to the plaintiff?

The learned trial Court reached to the conclusion that charging compound interest by itself is usurious and relying on the case of Union Bank of India v. Dhanekula Koteswararao and Ors. 1978 (2) ALT 87 : 1979 (2) An.W.R. 165 : 1979 (1) APLJ 87 held that the simple interest at the rate of 12% per annum would be reasonable in the circumstances of the case, but, the plaintiff-Bank could not establish as to how interest has been calculated in the statement of account Ex. A-6 and, therefore, decreed the suit for Rs. 23,000/- only without costs and awarded future interest at the rate of 6% per annum only.

Feeling aggrieved by the Judgment and decree of dismissal of claim of interest, the plaintiff-Bank has preferred this appeal.

Relying on the case of State Bank of Hyderabad and Vs. Advath Sakru and another, it has been urged on behalf of the appellant-Bank that Section 21-A of the Banking Regulation Act, 1949 (for short ''the Act'') applies to all transactions entered into between the Banking company and its debtor whether the transaction was entered into prior to its commencement or after. Section 21-A of the Act applies to suits pending on the date of coming into force of the said Section and it makes no distinction between an advance made for agricultural purpose or for commercial purpose and it equally applies to both.

On the other hand, it has been urged on behalf of the respondents that the Apex Court in the case of Corporation Bank Vs. D.S. Gowda and Another, has held that in case of commercial loans interest with quarterly rests is permissible. But, in case of agricultural loans/advances interest can be fixed with annual rests coinciding with the time when the farmer can repay and if thereafter the farmer fails to pay the interest it would be open to compund the interest on the crop loan and instalments upon the term loan becoming overdue the appellant-Bank has fixed the rate of interest with periodical rests in disregard of the circulars/directions issued by the Reserve Bank of India under Sections 21 and 35 of the Act. Section 21-A of the Act is not attracted and the Court could reopen the transaction between the Bank and the borrower and grant suitable relief.

The case of Bank of India v. Karnixm Ranga Rao and Ors. (Civil Appeal No. 544 of 1986) was decided with the case of Corporation Bank Vs. D.S. Gowda and Another, wherein the Apex Court has noticed the circulars/directions issued by the Reserve Bank of India, relating to charging of interest on advances, on 14-3-1972,5-10-1974,13-3-1976,17-8-1976,28-2-1978 and 15-9-1984 in para 12 of its judgment and has held that:

"From 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 they short-term or middle-term 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 from 1-3-1978, with 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 (3 supra). So far as agricultural loans are concerned, having regard to its special characteristics and the time factor relating to the farmer''s 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 o 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 or medium-term loans become overdue, interest outstanding to the principal amount may be added and compounded. The procedure in regard to charging of interest on short-term and medium-term agricultural loans is, therefore, clearly spelt out in the first circular of 14-3-1972. There is no ambiguity about it."

Again in para 23 of its judgment, the Apex Court has observed in relation to the Bank''s right to charge compound interest, that is, interest with periodical rests on agricultural advances, which is as follows:

"We have already referred to the various circulars issued by the Reserve Bank from time to time in exercise of power conferred by Section 21/35-A of 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 or six-monthly rests 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 or half-yearly rests 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 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 with six-monthly rests 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 dated 14-3-1972."

The Apex Court expressed in respectful agreement with the following interpretation placed on Section 21-A of the Act by the High Court in the case of H.P. Krishna Reddy Vs. Canara Bank, Bangalore, :

"The Courts cannot reopen any account maintained by banks relating to transaction with its customers on the ground that the rate of interest charged, in the opinion of the Courts, is excessive or unreasonable. Section 21-A of the Bank Regulation Act is, a restraint on such power of Courts. However, in any case, if it is proved that the interest charged by banks on loans advanced is not in conformity with the rate prescribed by the Reserve Bank then the Court could disallow such exess interest and give relief to the party notwithstanding the provisions of Section 21-A. Banks are found 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 by banks in excess of the prescribed limit would be illegal and void. Banks cannot charge compound interest with quarterly rests on agricultural advances."

I deduce from the law laid down in the Corporation Bank v. D.S. Gowda (3 supra) that in the case of agricultural loans/advances the position has been made amply dear by the circulars issued from time to time by the Reserve Bank of India, which circulars do not permit to charge compound interest with quarterly rests. The interest can be fixed with only rates coinciding with the point of time when the farmer is fluid, that is to say, after harvesting and marketing of his crop 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 loan becoming overdue. And, in such circumstances, where it is proved that the interest charged by banks on loans advanced is not in conformity with the rate prescribed by the Reserve Bank of India then the Court should disallow such excess interest and give relief to the party notwithstanding the provisions of Section 21-A of the Act.

Admittedly, in the case in hand, the advance of Rs. 23,000/- was made by the appellant-Bank to respondent No. 1 for agricultural purposes only and the Bank has charged interest at the rate of 13% per annum on half yearly rests which is impermissible in law.

In the case of Indian Bank v. P.V. Satyavathi 1993 (1) An.W.R.607 a Division Bench of this Court has held that the Court can award, in a money decree, interest from the date of suit as well as interest subsequent to the decree on the principal sum adjudged in accordance with Section 34 of the Code of Civil Procedure.

For the foregoing reasons, I frame the following issue:

"What amount of interest the plaintiff-Bank is entitled to claim from the defendants in view of the various circulars issued by the Reserve Bank of India?"

The lower Court is directed to permit both the parties to the suit to file various circulars issued by the appellant-Bank (sic. Reserve Bank of India) from time to time in respect of charging of interest on agricultural advances and permit the parties to lead evidence only in respect of the issue framed by me. The appellant-Bank is directed to submit a revised statement of account on the basis of the relevant circulars regarding the rate of interest to be charged in respect of agricultural loans. The respondents-defendants may also file a similar statement.

In result, the appeal is allowed and the judgment and decree passed by the lower Court are set aside and the case is remanded to it for fresh decision, according to law, keeping in view the aforementioned directions. Costs to abide and follow event. The parties through their Counsel are directed to appear before the trial Court on 5-9-1995 for further proceedings of the case.