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PETITIONER: CANARA BANK.

       Vs.

RESPONDENT: P.R.N.UPADHYAYA & ORS.

DATE OF JUDGMENT:       25/08/1998

BENCH: A.S> ANAND, M.SRINIVASAN, S. RAJENDRA BABU.

ACT:

HEADNOTE:

JUDGMENT:  J U D G E M E N T 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 12.1.1980, the appellant bank sanctioned  a  loan of Rs.    80,000/- in favour of respondent no.3 on 21.2.1986 to meet part of the construction cost of the premises  which were to  be  taken on lease by the appellant.  On 22.2.1991, an additional loan of Rs.  2,00,000/-  was  granted  by  the appellant  bank  to  respondent  no.3  to construct a bigger strong room.      The    entire    premises,    after    the construction/renovation,   were   taken   on  lease  by  the appellant bank.    In  respect  of  the  loan   granted   on 12.1.1980, 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 Demand Promissory Note was also executed by respondent no.3 in respect of  the loan dated 22.2.1991 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.   The two loans granted in the year 1980 and 1986 were, after repayment, closed in 1988 and 1989 respectively. Interest in respect of those loans had been debited  at  the contractual rate  with  quarterly rests.  The appellant bank also debited 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

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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 loan granted in 1991.  The respondents  requested the Banking Ombudsman for a direction 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  higherr interest to the loan accountt granted in 1991 and to pay the balance amount,  if  any, to the respondents.  The complaint was entertained by the  learned  Ombudsman  and  notice  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 the year 1980 and 1986 which stood closed in 1988 and 1989 respectively.  The learned Ombudsman, after referring to the circular dated  April  18,  1991  (Circular s[[[eems  to  bee  of  April  1,  1991)  and  certain  other circulars opined that the loans granted by  banks  to  their landlords  for construction/renovation of premises which the banks take on lease or rent lateron,  cannot  be  termed  as "term loans".    THe  learned  Ombudsman also opined, on the basis of the judgement in Harbans Singh’s case (supra), 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  grievance  of  the  complainant regarding   mode  of  calculation  of  simple  interest  and appropriation of credits received can by considered;

3.Whether the reopening  of  the  charging  of interest  can be entertained keeping in view Section 21 A of the Banking Regulation Act; 4.Whether  the  bank  is  justified  to charge inte[[rest over and above the contractual rate; AND 5.Charging    of    interest    on   quarterly compounding basis. Since, there is no controversy raised before  us  as regards  the  first  three  issues,  we  are relieved 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. As per this circular  it is clear that the bank can charge interest only at a rate contracted at the time of sanction of the loan and h=the bank is not entittled to very  the  rate  of  interest whomover  there  to vary the ratte of interest rate for term

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loands. I therefore,  hold  this  point  in  favour  of  the complainant." While dealing with issue no.5, the learned Ombudsman observed :- "As  regards  the  fifth  issue  it is observed that charging  of  interestt  at  quarterly  rests  was  also  in violation  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 illegal.  The trial court and the District Court, therefore, are quite right in limiting the liability of the  respondent only to pay simple interest on the loan advanced by the Bank at 15% per annum with out quarterly rests. The  above  decision  is  equally  applicable to the facts of the present case and the point under consideration. In view of the above  decision  of  the  Honourable  Supreme Court  I  have  no  hesitation  to hold that the bank is not entitled to charge compound rate of  interest  on  quarterly 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 clearly provided that scheduled banks could charge interest with quarterly  rests.    Emphasis  in this  behalf  was particularly laid on the following excerpt from the communication of the Reserve Bank  of  India  dated March 13, 1976: "1 (ii) no scheduled commercial bank incorporated in India and having aggregate demand and  time  liabilities  of Rs. 25 crores or about but less than Rs. 50 crores as on the 12th  March,  1976  or  at any time thereafter, shall charge interest on loans/advances/case  credits/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 treated as "Term Loans" and charged  interest acordingly and that this position and been further clarified by  the  Reserve  Bank  of  India through its circular dated April 18, 1991, wherein it was stated that the minimum  rate of  interest on loans advanced to landlords for the premises leased out to the banks should be at the  rate  of  15%  per annum.   It was submitted that communication dated April 18, 1991 read with the earlier communication of March 13,  1976, April  1,  1991  and March 7, 1986 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

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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 Bank of India under Section 21 orr Section 35 of the Banking regulation Act, 1949  and  as  such  that  judgement could  not  be  treated  to  have  laid  down  the law after considering various circulars issued by the Reserve Bank  of India, which have a statutory flavour. That  the  circulars  issued  by the Reserve Bank of India under Section 21 or 35 of the Banking Regulation  Act, 1949 are statutory in nature and are required to be complied with by  the  banks  is  not  in  any  doubt.   An Ombudsman appointed under  the  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  which are  taken  for  commercial  purposes can be construed to be term loans", is clearly erroneous and does not appeal to us. The expression "term loan"  is  well  understood  in banking parlance.   The expression implies the grant of loan for a fixed term. It has no relevance with the  purpose  for which loan is granted. Where the term for repayment is long, the  loan  is  called  "long  term  loan" and where the term exceeds one year but not five to seven years, it is commonly known 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  bank         agrees  to  do  so  and subject to such terms as the         bank may like to impose.  Thus  the  bank  does  not         suffer  any loss of interest as a result of carrying         excessive case which is necessary  in  the  case  of         case  credits and overdrafts. Loan accounts are said         to have a lower operating cost than case credits and         overdrafts  because  of   the   larger   number   of         operations  in the case of the latter as compared to         the former and consequently a lower rate of interest         on loans appears to be justifiable than in 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  generally  granted  for  fixed         capital   requirements,   although  such  loans  for         working capital are not unknown, and are supposed to         be repaid  out  of  future  earnings  of  the  fixed         assests   in  particular  and  of  the  borrower  in

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       general. It therefore requires  a  proper  and  more         sustained  appraisal  of  various  factors commected         with the proposition  than  an  ordinary  commercial         demand loan." Thus, the opinion of the learned  Ombudsman  to  the effect  that  circulars  of  the Reserve Bank of India which permitted 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 advanced for commercial purposes but also such loans as one advanced  to  the  landlords  for construction/renovation  of  the buildings given on lease to the lending bank for their commercial  purposes.  A  careful persual  of  the  judgement in Harbans Singh’s case (supra), howeever, shows  that  the  Bench  was  handicapped  because various  circulars/notifications/directions  issued  by  the Reserve Bank of India under Sections 21 and 35  of  the  Act dealing  with  the subject were not brought to the notice of the Bench. 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 placed by the appellants and the respondent." It  was,  thus,  on  account  of  lack  of  relevant material before it, that the Bench opined: "In  the  light  of  these  intrrinsic   factual   material, directions  by  the  Reserve  Bank  and  circumstance of the landlord, who had taken loan for constructing  the  premises and  leasing back to the bank for commercial purpose, to pay interest at more than 15% and he need not  pay  interest  at quarterly rest.    The  letter  of  RBI dated 13.3.1976 also indicates that the obligation 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 intended  would  be  clear  from  clause 1(ii) of the letter relied on by the bank (Ex.  P-7) as extracted earlier.    It would  indicate  that  in  respect of commercial loans, they appear to have intended  to  charge  quarterly  rest.    The Reserve  Bank at nowhere indicated that the term loans given to the landlords for construction of the buildings to  lease back  to  the  commercial  banks  should  be  intended to be charged with interest with quarterly rest.    On  the  other hand,  they have reduced sufficiently from time to 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

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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 Reserve Bank of India which have statutory force with regard to the meaning of "term loan" or charge of interest from the landlords with quarterly rests.       Learned counsel for the parties  before  us,  did  not dispute   that   there   have   been   more   than  a  dozen circulars/notifications/directions  issued  by  the  Reserve Bank  of  India,  which  deal  with  the  subject of rate of interest to be charged from tghe landlords laonees  and  the manner  of  its  calculation.  A  critical  examination  and application of those circulars was necessarry to decide  the complaint  filed  by  the  respondents against the appellant bank, which unfortunately the learned Ombudsman did not  do. Since,  an  Ombudsman  is  appointed by virtue of the Scheme framed under Section 35 A of  the  Banking  Regulation  Act, 1949,  he is obliged to comply with the directions/circulars and notifications issued by the Reserve Bank of India  under Section  35  or  21 of the Act. He is also required to issue directions to Banks, based on those directions/circulars and ensure their compliance. The  learned  Ombudsman  could  not have ignored the circulars and directions while dealing with the  complaint  filed  by the respondent. The impugned award having  been  made  ignoring  various   circulars/directions issued  by  the  Reserve  Bank  of India, the same cannot be sustained. It is therefore, appropriate that  we  set  aside the  impugned  award dated 26.2.1997 and remit the complaint to the learned Ombudsman (Hyderabad) for its fresh  disposal in  the  light  of  the  circulars/directions  issued by the Reserve Bank of India with regard to  charging  of  rate  of interest  from  the  landlord  loanees,  whose buildings are taken on lease/rent by the concerned  bank  and  calculating the  interest  at  quarterly rests. Accordingly, this appeal succeeds and is allowed. The complaint is  remanded  to  the learned Banking Ombudsman, Hyderabad, for its fresh disposal in the light of the observations made hereinabove.        Since,  we  are remanding the complaint for its fresh disposal on merits, we have refrained from  expressingh  any opining  on  the  effect of various circulars/directions and notifications issued by the Reserve Bank  of  India  on  the subject  under  consideration  were  not  placed  before the learned Ombudsman earlier, the same shall be permitted to be brought on the record  by  the  learned  Ombudsman  and  the parties  given  an  opportunity  to have their say in regard there to.        The appeal is disposed of in above terms. No costs.