LexCANARA BANK versus P.R.N. UPADHYAYA AND ORS.
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CANARA BANK v. P.R.N. UPADHYAYA AND ORS. AUGUST 25, 1998 (DR. AS. ANAND, M. SRINIVASAN AND S. RATENDRA BABU, JJ.] Banking Regulation Act, 1949-Section 21, 35--Circulars issued by Rese1ve Bank of India-Held, Statuto1y i11 nature and required to be complied with by the ba11ks. S.35A-Banking Ombudsman-Appointed by virtue of the scheme framed u11der the sectio11:-Dutie;~Held, to regulate tlze working of the banks and to issue directions to cany out the circulw:> and directions issued by the Rese1ve Ba11k of India. Words & Phrases-Temz Loan-Mea11ing of in the context of banking law and practice. The appellant-bank sanctioned loans of Rs. 811,000 on 12.1.1980, Rs. 25,11110 on 21.2.1986 and Rs. 2,00,11011 on 22.2.1991 in favour of respondent no. 3 for construction of strong rooms which were to be taken on lease by A B c D E the appellant after construction/renovation. In respect of loans granted on 12.1.19811, 21.2.1986 and 22.2.1991, respondent no. 3 executed Demand Promissory Notes undertaking to pay interest at the rate of 5% above the Reserve Bank of India rate of interest with minimum rate of interest @ F 14% per annum compounded lJUarterly, 7.5% above the R.B.I. rate of interest with minimum rate of interest @ 17.5% per annum compounded 11uarterly and 7.5% above the R.B.I. rate of interest with minimum rate of intel'est @ 17.5% per ';mourn compounded quarterly, respectively. The two loans granted in the.year 19811and1986 were, after payment, closed in 1988 and 1989 respectively. Interest in respect of those loans was debited at the G contractual rate with quarterly rests. The appellant - bank also debited interest with quarterly rests in respect of the loan of Rs. 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 Oftice Circular no. 379/~0 and no. 911/91. H 93 94 SUPREME COURT REPORTS [1998) SUPP. 1 S.C.R. A Respondent nos. 2 to 5 filed a complaint before the Banking Om- budsman 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 1986 and also for debiting interest with quarterly rests in respect of the loans granted in 1991. The respon- B dents sought a direction from the Banking Ombudsman to the appellant - bank to recast the interest debited in all the loan accounts by debiting interest at simple rate and to adjust the excess amount charged by way of higher interest to the loan account granted in 1991 and to pay the balance amount, if any, to the respondents. The contention of the appellant - bank before the Banking Ombudsman was that its action was based on various C circulars issued by the Reserve Bank of India from time to time including the circulars dated 1.4.1981, 7.3.1986 and 17.5.1994. The Banking Om- budsman relying upon the judgment in State Bank of Patiala v. Harbal!S Singh, [1994] 3 SCC 495 allowed the complaint of respondent nos. 2 to 5 and directed the appellant - bank to recast the two loan accounts for the D year 1980 and 1986 which stood closed in 1988 and 1989 respectively. The Banking Ombudsman held that (i) the loans granted by banks to their landlords for construction/renovation of premises which the banks take on lease or rent later on, cannot be termed as "Term Loans", and (ii) 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 E rate of not more than 15% in respect of the loan granted to a landlord .. Against the aforesaid award dated 26.2.1997 made by the Bank Om- budsman the appellant - bank has filed this appeal. The contention of the appellant - bank was that communications F dated March 13, 1976, April 1, 1991, April 18, 1991 and March 7, 1986 issued by Reserve Bank of India clearly indicate that the loans advanced by banks to landlords for construction/renovation of premises to be taken by the banks for its use on lease/rent were required to be treated as "Term Loans" and the banks were entitled to charge interest at the minimum rate of 15% per annum compounded with quarterly rests. G Allowing the appeal, the court HELD : 1.1. Circulars issued by the Reserve Bank of India under Section 21 or 35 of the Banking Regulation Act, 1949 are statutory in H nature and are required to be comp
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