1998 (4) TMI 542 - HC - Indian Laws

Summary

Issues Involved:
1. Unauthorized deductions by the bank.
2. Terms of loan repayment.
3. Charging of interest with quarterly rest.
4. Calculation errors in equated monthly installments (EMI).
5. Legality of unilateral changes to loan terms.
6. Compliance with Reserve Bank of India (RBI) circulars and Supreme Court rulings.

Detailed Analysis:

1. Unauthorized Deductions by the Bank:
The petitioners sought a writ commanding the respondent bank to forbear from making unauthorized deductions and refund the amount deducted in purported liquidation of a loan. The petitioners argued that the bank's deductions were against the terms of the agreement, contrary to the bank's own stand, and in violation of RBI circulars and Supreme Court rulings. The bank's actions were characterized as high-handed, unreasonable, and arbitrary.

2. Terms of Loan Repayment:
The loan of Rs. 12,00,000 was to be repaid in monthly installments of Rs. 18,000 over ten years, totaling Rs. 21,60,000. The repayment term did not mention charging interest with quarterly rest. The bank took possession of the premises constructed with the loan on 15.9.1984, and the ten-year repayment period was to end on 15.9.1994.

3. Charging of Interest with Quarterly Rest:
The bank's action of charging interest with quarterly rest was found to be contrary to the agreed terms and the law laid down by the Supreme Court. The Supreme Court, in State Bank of Patiala v. Harbans Singh, held that landlords taking loans for constructing premises to lease back to banks for commercial purposes need not pay interest at more than 15% per annum or with quarterly rest.

4. Calculation Errors in Equated Monthly Installments (EMI):
The bank later claimed that due to a calculation error, the EMI was wrongly fixed at Rs. 18,000 instead of Rs. 19,223.50. This resulted in the bank allegedly short-charging the petitioner by Rs. 1,46,820 over ten years. However, the figures provided by the bank did not add up correctly, showing discrepancies in the outstanding balance and the amounts recovered.

5. Legality of Unilateral Changes to Loan Terms:
The bank's unilateral modification of the loan repayment term, purportedly to correct a calculation error, was challenged as illegal under Section 22 of the Indian Contract Act. The bank's action was seen as taking unfair advantage of its dominant position. The court found considerable force in the petitioners' argument and noted that the bank had practically abandoned its initial stand.

6. Compliance with RBI Circulars and Supreme Court Rulings:
The bank's insistence on charging interest with quarterly rest was also contrary to the terms of the agreement and the Supreme Court's decision. The court noted that the bank's actions were not in line with the RBI's directions, which did not mandate quarterly rest for loans given to landlords for constructing buildings to lease back to banks.

Conclusion:
The court held that the petitioners' loan was fully satisfied on payment of the 120th monthly installment of Rs. 18,000 by 15.9.1994, plus the additional amount for interest tax from 1.10.1991 to 15.9.1994. The bank was directed to recast the petitioners' account accordingly and refund the excess amount deducted with interest. The bank's actions were criticized for not paying heed to the petitioners' protests and for making unauthorized deductions. The application was allowed with costs of Rs. 2200.