CORPORATION BANK versus D.S. GOWDA AND ANR.

Citation: [1994] SUPP. 1 S.C.R. 170 · Decided: 20-06-1994 · Supreme Court of India · Bench: A.M. AHMADI · Disposal: Disposed off

Judgment (excerpt)

A 
B 
CORPORATION BANK 
v. 
D.S. GOWDA AND ANR. 
JUNE 20, 1994 
(AM. AHMADI AND S.C. AGRAWAL, JJ.) 
Banking Regulation Act 1949-Sections 21, 21-A and 35- A-Reserve 
Bank of lndia's Circulars and directives issued thereundei--lnterest with pe-
riodical rest chargeable by banks-For commercial loans, interest with 
C quarterly rests held permissibl~or agricultural loans interest can only be 
fixed with annual rests coinciding with the time when th~ farmers can 
repay-Compound interest chargeable only when entire loan becomes over-
due-Held : Circulars and directives of Reserve Bank are based on rational 
policy, have statutory force and binding on banks-Where rate of interest with 
D periodical rests is f1Xed by Bank in disgard of RBI circulars, held, Court can 
reopen transaction and grant suitable relief. 
Mysore Usurious Loans Act 192J-Section 3(1) Explanations I & II 
(a) and (d}-Commercial loan-Bank charging interest at 16.5% per annum 
with quarterly rests-In accordance with maximum prescribed by cir-
E culars/directions of RBI under Sections 21 and 35 of Banking Regulation, 
Act 1949-Substantial unfaimess--Rebuttal of-Special circumstances'-No 
evidence led by boiTower to rebut-Held : Interest charged not excessive. 
Banker and customer-Bank loan-interest with periodical rest;-
F Governed by terms of agreement between bank and bo1rower-ln the absence 
of agreement the practice is to debit accrued interest to bo"ower's account at 
regular periodic intervals. 
G 
In these appeals by Corporation Bank against the Judgment of the 
Karnataka High Court, the following qnestions arose for consideration: 
1. Whether the Bank is entitled to claim interest with periodical 
rests, e.g., a monthly rest, a quarterly rest, a six monthly rest, or a yearly 
rest, or compound interest in any other manner, from a borrower who 
has obtained a loan or an advnace for agricultural/commercial purposes, 
H as the case may be? 
170 
CORPN. BANK v. D.S. GOWDA 
171 
2. Whether the Banks are bound to follow the directives/circulars A 
issued by the Resen'e Bank of India in exercise of power conferred by 
Section 21 or the Banking Regulation Act, 1949 prescribing the structure 
of interest to be charged on loans/advances made from time to time, and 
if yes, to what rxtent? 
3. Whether in view or the insertion or Section 21A in the Banking 
Regulation Act, 1949 by Banking Loans (Amendment) Act, 1983, Courts 
are precluded from subjecting transactions entered into between the Banks 
and borrowers from scrutiny under the provisions or the Usurious Loans 
B 
Act, 1918 or any other similar State law, with a view to giving relief 
thereunder, and, if yes, whether relier under such laws is wholly impermis· C 
sible? and 
(4) Whether the directives/circulars issued by the Reserve Bank of 
India under Section 21 of the Banking Regulation Act, 1949 can be 
termed as a 'Special circumstance' within the meaning of Explanation 1 D 
to Section 3 of the Mysore Usurious Loans Act, 1923? If yes, what is its 
effect? 
Disposing of the appeals, this Court 
HELD : 1.1. Although there is no common law right to charge E 
interest on an overdraft by universal custom of bankers a reasonable rate 
of interest on overdraft~ is permissible. So also charging or interest with 
periodical rests or compounding or interest would be allowed if there is 
evidence of the customer having acquiesed therein, provided the relation-
ship of banker and customer is subsisting. However, if the relationship F 
under goes a change into that or mortgagee and mortgagor by the taking 
of a mortgage, the charging of interest would be governed in accordance 
wit~ the terms of the mortgage. The taking or a mortgage to secure the 
fluctuating balance of an overdrawn account, being not inconsistent with 
the relationship or banker and customer, would n.ot displace an earlier G 
right to charge compound interest. Thus the practice of bankers to debit 
the accrued interest to the borrower's current account at regular periodic 
intervals is a recognised practice. The circulars issued by the Reserve Bank 
are not inconsistent "ith this recognised practice. [190·A·B·C·D] 
1.2. As under the common law there is no right to charge even simple H 
172 
SUPREME COURT REPORTS (i994] SUPP. 1 S.C.R. 
A 
Interest oli overdrafts, the claim of interest has to be supported on the 
ground of universal custom of bankers or on the basis of implied agree· 
ment. This would be so in a case where there is no agreement

Excerpt shown. Read the full judgment & AI analysis in Lexace.