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TMI Blog1985 (11) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and also claimed at the same rate in the suit. 3. Defendants while admitting the loan taken, however, denied their liability to pay interest with quarterly rests on the ground that the loan was for agricultural purpose and the Bank by the settled practice has not right to charge periodical compound interest. They also prayed for grant of instalments to 1 repay the loan in five equal annual instalments. 4. On the basis of the pleadings, the trial Court framed the following issues : (1) Whether the plaintiff was not entitled to charge compound interest? (2) Whether the defendants are entitled for five equal instalments? 5. The parties did not produce oral evidence, perhaps, in view of the fact that the defendants did admit the loan transaction. Defendant 3 remained ex-parte. The produced by the Bank were marked as Exs. P1 to P15. Ex. PI is the demand promissory note dated April 29, 1976 for ₹ 10,000/- payable with interest at the rate of 4 per cent per annum above the Reserve Bank of India rate subject to the minimum of 13 per cent with quarterly rests. Ex. P2 dated April 29, 1976 is a letter acknowledge gift the debt and the liability to pay. Ex. P3 is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve Bank, inter alia, states that the Bank has debited interest to the crop loan account thrice before the due date of repayment of the loan and also compounded the interest. But compounding of interest on current dues on agricultural advances has been prohibited by the circulars of the Reserve Bank. The Bank, however, could add interest outstanding to the principal and compound the interest when the crop loan becomes overdue keeping in view what has been stated in the circular dated March 14, 1972. As such, the Bank compounding of interest at half-yearly intervals after the loan amount has become overdue cannot be questioned. As per the Reserve Bank directive dated February 28, 1978, Banks should charge interest with quarterly or longer rests. The interest charged by the Bank with half-yearly rests was, therefore, in compliance with the instruction contained in the directive. 8. The essential question we have to decide is whether the Bank was justified in charging interest with half-yearly rests on the agricultural loan amount due and outstanding from the defendants. It is, first, convenient to understand the meaning of the term Rest which is the exclusive preserve of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of old debts and for the Long-term investments. That being so, in agricultural financing, the question of the normal commercial banking conditions as in overdrafts would not come into play and the bank 'custom' and habits which are usual in the case of commercial banking cannot be smuggled into agricultural financing. On a consideration of evidence adduced in that case, learned Judge also held that there was no agreement to charge-compound interest on the loan taken. (ii) The next case in point of date is, D. S. Gowda v. Corporation Bank, AIR1983Kant143 . It was not a case concerned with the agricultural advance. The loan concerned in that case was for a commercial purpose and the interest charged thereon was with monthly and quarterly rests. This Court examined the customary practice of Banks to charge compound interest monthly or quarterly on advances and also incidentally considered the right of Banks to charge such interest on agricultural loans under the directives of the Reserve Bank of India. On the first question as to customary practice, it was observed: It is thus clear that the ordinary practice or custom of banks was only to charge interest w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged by the banking company in respect of such transaction is excessive. The scope of this section was considered by this Court in Krishna Reddy v. Canara Bank, AIR1985Kant228 , where the conclusion was expressed : The mandate of this section is that Courts cannot re-open the account relating to a transaction between a Banking Company and its customer on the ground that the rate of interest charged, in the opinion of Courts, is excessive or unreasonable. The Courts, in other words, cannot exercise jurisdiction under the Usurious Loans Act or any other law relating to indebtedness for the purpose of giving relief to any party. This appears to be the intent of the Legislature in enacting the Banking Laws (Amendment) Act, 1983. Section 21A has, however, no bearing on the jurisdiction of Courts to give relief to an aggrieved party when it is established that the Bank in a particular case has charged interest in excess of the limit prescribed by the Reserve Bank of India. X X X X XX X X If, in any case, it is proved that the Bank has charged interest in violation of the direction of the Reserve Bank, the Court could give relief to the aggrieved party notwit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular I is by far the most important. It has a decisive bearing on the question that falls for determination. It is, therefore, necessary to analyse the circular in detail. Paragraph (1) of the circular reads: CHARGING OF INTEREST ON AGRICULTURAL ADVANCES . There is at present no uniformity in the manner of charging interest on the various types of agricultural advances by Banks. Although interest is compounded at monthly, quarterly or half yearly rests on advances, such a system of compounding in the case of agricultural advances may not be suitable. The agriculturists do not have any regular source of income other than the sale proceeds of their crops. They will not, therefore, be in a position to pay interest at usual fixed intervals. Paragraph (2): Having regard to the special characteristics of agricultural finance, banks are advised to bear in mind the following principles in the matter of application of interest on such advances. i) Repayment period of agricultural advances, whether short-term or medium term should be so fixed as to coincide with the period when the farmer is fluid i.e., after harvesting and marketing of his crops. Payment of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring to the contents of Circular 1, explained its meaning in his own characteristic style. He urged that what has been prohibited by the circular is only compounding of interest on current dues and not the right of Banks to charge compound interest with periodical rests when the loan becomes overdue. Such a periodical rests, according to counsel, must be quarterly and above. The first part of the submission is obvious and causes no difficulty. Sub-para (ii) of Para (2) of the Circular expressly directs that interest on current dues should not be compounded. The Bank, however, has charged compound interest in this case on current dues. It is clear from the report of the Reserve Bank. It only shows, even obvious directive is not followed by the Bank. The interest charged on current dues is illegal and must be disallowed. The second part of the contention appears to be ingenious, but it overlooks the indwelling and inherent reasons underlying Circular I, The circular, no doubt, permits Banks to charge compound interest. There is indeed, no dispute as to the right of Banks to charge compound interest when the loan becomes overdue. The dispute is only as to the interval at which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally most of the farmers, unless their lands are located within the Atchkat area of any irrigation project, have to depend upon the vagaries of climate. Their anticipated showers do not come always in time. Good seasonal conditions which are a sine qua non of the economic prosperity of the farmers is more often their distant dream. If there is no proper seasonal distribution of rain fall, the farmers would be hard put even to eke out their living. The common experience in the recent past is that even the area which is well favoured by nature, cannot be sure of yearly rains. If there are more rains, they face calamities of floods of the rivers and streams. (vii) The plough animal of the farmers is still the bullock which continues to be the main source of power for cultivation. Their other possessions are cows, sheep, goats and poultry. They are more often exterminated by common contagious diseases like black quarter, haemorrhagic septicaemic, anthrax, parasitic diarrhoea, sheep-pox and rinderpest etc. These are the problems of persons who feed the Nation. They have to live with these problems throughout their life. That is why, in our opinion, the Reserve Bank by Circular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under S. 21 of the Banking Regulation Act, 1949 16.50 per cent per annum with quarterly rests. It seems to suggest that it would be obligatory for Banks to charge interest at 16.50 per cent with quarterly rests, but it has no reference to the interest to be charged on agricultural advances . So, Circular IV dated August 17, 1976 was issued by the Reserve Bank clarifying the position in regard to payment of interest on agricultural advances. 18. Circular IV dated August 17, 1976: This has been addressed to all Scheduled Commercial Banks and it reads : Dear Sirs, Method of charging interest on Agricultural Advances. Please refer to our directive DBOD No. DIR B. C. 30/C. 96-76 dated the 13th March, 1976 stipulating the maximum rate of interest that could be charged on loans, advances, etc., by scheduled commercial banks. It has been stated therein that interest shall be charged with quarterly rests. It is clarified that this aspect of the directive will not apply to agricultural advances in respect of which the instructions issued in our letters No. Nat. 389/C 453(A)-72 dated the 14th March, 1972 and No. BP. B. C 107/C. 453(A)-74 dated the 5th October, 1974 will con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or charging interest on all loan accounts and not exclusively pertaining to agricultural loans. The relevant portion of the circular reads: Dear Sir, Compounding of interest by Commercial Banks. As you are aware, the Reserve Bank of India has issued following guidelines to Commercial Banks regarding the procedure for charging interest on loan accounts: (a) Banks can charge interest on loan accounts at quarterly or longer rests. (b) In respect of direct agricultural advances banks should not compound the interest in the case of current dues, i.e., crop loans and instalments not fallen due in respect of term loans, as the agriculturists do not have any regular source of income other than sale proceeds of their crops. (c) When hen crop loans or instalments under term loans become overdue, banks can add interest outstanding to the principal. (d) Where the default is due to genuine reasons banks should extend the period of loan or reschedule the instalments under term loan. Once such a relief has been extended the over dues become current dues and banks should not compound interest. We shall be glad if you will let us know early, say, by 29th Sept ..... X X X X Extracts X X X X X X X X Extracts X X X X
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