CENTRAL BANK OF INDIA v. RAVINDRA AND ORS.

interest charged in excess of the minimum rate of interest appointed by the A Reserve Bank without fixing a ceiling and levying higher rate to be charged at the discretion of each bank can be treated as excessive and unconscionable and whether in such situation Section 21A would debar the Court from reduc- ing the rate of interest. to a reasonable limit was left open and undecided as the same did not arise in the case before the Court. However it was made very clear B that if the Reserve Bank has fixed the maximum rate of interest under Sections 21/35A of the Act any transaction charging interest within the limit so ap- . pointed would not be treated as excessive.

It is interesting to note that the sanie Bench which decided D.S. Gowda s ca5e also decided State Bank of India, Bhubaneswar v'. Ganjam Di~trict Tractor C Owners Association and Ors., [1994] 5 SCC 238, and held that where the agreement between the bank and the borrower did not provided for payment of compound interest or interest with periodical rests, the bank could not have charged the same. D During the course of hearing it was brought to our notice that in view of several Usury Laws and Debt Relief Laws in force in several States private money lending has almost come to an end and needy borrowers by and large depend on banking institutions for financial facilities. Several unhealthy prac- tices having slowly penetrated into prevalence were pointed out. Banking is an organised institution and most of the banks press into service long running documents wherein the borrowers fill in the b_lanks, at times without caring to read what has been provided therein, and bind themselves by the stipulations articulated by best of legal brains. Borrowers other than those belonging to corporate sector, find themselves having unwittingly fallen into a trap and rendered themselves liable and obliged to pay interest the quantum whereof may at the end prove to be ruinous. At times the interest charged and capitalised is manifold than the amount. actually advanced. Rule of damdupat does not apply. Penal interest, service charges and othe. over-heads are debited in t'he account of the borrower and capitalised of which debits the borrower may not even be aware. If the practice of charging interest on quarterly rests is upheld G· _, and given a judicial recognition, unscrupulous banks may resort to charg.ing interest even on monthly rests and capitalising the same. Statements of Ac- counts 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 rr..::dical · prescriptions putting to test the eyes and wits of the borrowers. Instances of H .

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A 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 B 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 c 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, debtor entering into a fresh agreement with creditor D 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 acknowledgement of accounts, are best evidence of capitalisa- tion. Acquiescence in the method of accounting adopted by the creditor an? brought to the knowledge of the debtor may also enable interest being con- E verted 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 F 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 G . 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 capitalisa- tion. 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 H 011 being shown to the satisfaction of the Court that such debit ·entry was not

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brought to the notice of the borrower and/or he did not have the opportunity .A of making payment before capitalisation and thereby excluding its capitalisa- tion.

(5) The power conferred by Sections 21 and 35A of the Banking Regulations Act, 1935 is coupled with duty to Act. Reserve Bank of India is prime banking B 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. c 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 D 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 direc- tives may be treated as standards for the purpose of deciding whether the interest charged is excessive, usurious or opposed to public policy. E (6) Agricultural borrowings 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 voilation of RBI directives, as F to rate of interest, or as to periods at which rests can be arrived at, shall be dis- allowed and/or excluded from capital sum and be treated only as interest and dealt with accordingly.

(8) Award of interest pendente lite and post-decree is discretionary with the G Court as it is essentially governed by Section 34 of the CPC de hors 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 .'.ldvanced the Court may exercise its discretion in awarding interest pendente lite and post-decree inter- H

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A est 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 B 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 Reserv~ 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 c 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 ainount of debit balance appearing at the foot of the account and claimed as principal sum cannot be so accepted and adjudged. This practice would D · narrow down the scope of controversy in suits filed by banking institutions and. e.nable an expeditious disposal of the suits, the issues wherein are by and large capable of being determined by documentary evidence. RBI directives have noi only statutory flavour, any contravention thereof or any default in compliance therewith is punishable under sub-section (4) of Section. 46 of Banking Regu- . E lations Act, 1949. The Court can act on assumption that transacti~ns or dealings . have taken place and acco.unts maintaine<;l by banks in conformity with RBI directives .

. We have dealt with the. law governing the debtor and creditor relation- ship. We have not dealt with any provision or principle of taxation law F whereunder deemed payment of interest consequent upon capitalisation and actual payment whenever ma~e may be. tr~ated as capital or revenue which question shall ha.ve to be determined under the scheme of relevant statutory enactment.

·. G Subject . to the. above we answer the reference in. followi~g - . tenris : '. / . .

(1) Subject to a bi~ding stipulati~n contained in.a voluntary contract. between. the parties and/or an established practice or usage interes(on loans an"d ad- :. . yances may ·be charged on penodiCal rests and also ~~pitalised on remaining .H unpaid. T)Je principal sum actually advanced cou~led. with the 'interest on ·

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periodical rests so capitalised is capable of being adjudged as principal sum on A the date .of the suit.

(2) The principal sum so adjudged is 'such principal sum' within the meaning of Section 34 of the Code of Civil Procedure Code, 1908 on which interest pendente lite and future interest i.e. post~decree interest, at such rate and for such period which the Court may deem fit, may be awarded by the Court. B

(3) Corporation Bank v. H.S. Gowda and Am:, [1994] 5 SCC 213 and Bank of Baroda v. Jagannath Pigment & Chem have been correctly decided.

All the learned counsel for the parties did their best to assist the Court in arriving at a just decision on the issues of significance and far reaching c implications. However, we would like to place on record our appreciation of · valuable assistance given to Court by Shri Ranjit Kumar, Sr. Advocate assisted by Shri K.M.K. Nair and Shri A. Subba Rao, Advocates, who appeared as . amicus curiae on Court's request and with objectivity placed before the Court relevant material, judicial view-points and several authorities. As most of the D borrowers were unrepresented, the Court needed their assistance.

Let all these appeals and SLPs be now placed before appropriate Bench for decision.

V.S.S. Appeals disposed of.