A borrower taking loan on floating rate of interest – Bank cannot increase the rate of interest without notice and consent of borrower

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2nd  Additional Bench

 

STATE CONSUMER DISPUTES REDRESSAL COMMISSION, PUNJAB DAKSHIN MARG, SECTOR 37-A, CHANDIGARH

First Appeal No.  877 of 2013

 

Date of institution: 16.8.2013 Date of Decision:  8.6.2015

 

  1. ICICI Bank Limited, also at Shop Number 25, Sector 20, Block A, Behind Bank of Baroda, Motia Khan, Mandi
  2. ICICI Bank  Limited,Landmark,  Racecourse Circle,  Vadodara, through Shri Jeewan Garg, Manager

Versus

Appellants/OPs

Pankaj Goyal son of Jagmohan Lal, resident of House Number 511, Sector 3B, Main Bazaar, Mandi Gobindgarh, District Fatehgarh Sahib.

Respondent/Complainant

First Appeal against the order dated 4.6.2013
passed by the District Consumer Disputes
Redressal Forum, Fatehgarh Sahib.

 

Quorum:-

Shri Gurcharan Singh Saran, Presiding Judicial Member Mrs. Surinder Pal Kaur, Member

 Present:-

 For the appellants

:   Sh. Sandeep Suri, Advocate For the respondent

:    Sh. Ferry Sofat, Advocate

Gurcharan Singh Saran, Presiding Judicial Member

 ORDER

 The appellants/OPs (hereinafter referred as “OPs”) have filed the present appeal against the order dated 4.6.2013 passed by the   District   Consumer   Disputes   Redressal   Forum,   Fatehgarh Sahib(hereinafter referred as the District Forum) in consumer complaint No.48 dated 12.3.2013 vide which the complaint filed by  the respondent/complainant(hereinafter referred as the complainant) was accepted with a direction to the OPs not to charge more than 12.75% interest rate from the date of disbursement of the loan till date, then also pay Rs. 10,000/- on account of mental agony and harassment and Rs. 5,000/- as litigation expenses.

  1. A consumer complaint was filed by the complainant under the Consumer Protection Act, 1986 (in short ‘the Act’) against the OPs on the averments that he was sanctioned a loan against the property bearing A/c No. LBMGH00001662984 on 29.10.2007 for Rs. 43 lacs @ 14.25% per annum by OP No. 1, which was required to be repaid in 180 monthly instalments, which was fixed at Rs. 57,989/-. The complainant had paid the instalments regularly for the last 5 years. In the month of November, 2012 when the complainant approached OP Branch to obtain the copy of statement of his loan account then it came to his knowledge that OP No. 1 had increased the rate of interest from 14.25% to 17% and period of monthly instalments was extended from 15 years to 27 years without any intimation to the complainant. The complainant was not informed about such changes in the rate of interest. The bank also informed  the complainant on visit to the bank that by paying some amount to the bank, the interest rate of the said loan will be reduced or by increasing the amount of loan. He will be charged at the rate of interest, which was available to the new customers. The complainant was also not informed about these The increase in rate ofinterest without knowledge/consent of the complainant was unfair trade practice and deficiency in services on the part of the OPs which necessitated to file the complaint with the direction to the Ops to produce the circulars regarding the house loan, compensate the complainant for inconvenience and harassment, direct the Ops to adjust the increased rate of interest with the rate of interest as per sanctioned letter i.e. 14.25% directing the Ops not to charge any penalties on the last three unpaid instalments, pay a sum of Rs. 1 lac towards compensation and Rs. 5500/- as litigation expenses.
  2. The complaint was contested by the Ops, who filed written reply taking preliminary objections that the matter between the parties was related to the breach of contract, which was not maintainable before the Consumer Fora and he should have availed this remedy before the Civil Court; the complainant was not a consumer as defined under Section 2(1)(d) of the Act; the complaint of the complainant was bad for non-joinder of necessary parties as co-applicant Ajay Kumar Goyal, Radha Goyal and Sanjay  Kumar have not been impleaded as a party, under Section 21-A of the Banking Regulation Act, the rate of interest charged by the Bank was not subject to the scrutiny of the Courts. On merits, it was admitted that the loan of Rs. 43 lacs was sanctioned in favour of the complainant on interest @ 14.25% with monthly instalments of Rs. 57,989/-. It was denied that in the year 2012 the complainant visited the OP Branch and obtained the statement of account of his house loan account, he came to know about the increased rate of interest and the period was changed from 15 years to 27 In fact the complainant had obtained the loan on floating basis and the tenure of monthly instalment was increased when FRR was increased. It was denied that the complainant was not informed about the change in  the rate of interest. It was also denied that new customers were given the loan at 12.75% per annum. As and when the floating rate of interest was changed, the same was published on the website of the Bank and informed the customers at large through newspapers. It was denied that the complainant had paid a sum of Rs. 34,79,340/- in 60 installments or that a sum of Rs. 39,98,073/- was still outstanding as on 10.11.2012 whereas it should have been Rs. 35,63,493/-. It was denied that a sum of Rs. 4,34,580/- was charged as excess amount. It was also denied that the rate of interest was changed unilaterally. No merit in the complaint and it be dismissed.
  3. The parties were allowed by the learned District Forum to lead their
  4. In support of his allegations, the complainant had tendered into evidence loan application Ex. C-1, instalment details  C-2, letter to OP Ex. C-3. On the other hand, the opposite party did not tender any evidence.
  5. After going through the allegations in the complaint, written reply filed by the OP, evidence and documents brought on the record, the complaint was allowed as referred
  6. Aggrieved with the order passed by the learned District Forum, the appellants/OPs have filed the present
  7. We have heard the learned counsel for the
  8. It has been argued by the counsel for the OPs that as is clear from the complaint itself and documents on the record, the loan of Rs. 43 lacs was sanctioned on interest @ 14.25% per annum, which was required to be repaid in 180 installments whereas the learned District Forum has directed the Ops not to charge interest more than 12.75%, which is contradictory to the pleadings and documents itself. Para No. 1 of the complaint speaks that the loan was sanctioned on interest @ 14.25% per annum required to be repaid in 180 monthly instalments @ Rs. 57,989/- per month and in the year 2012 when he checked his statement of account, it was found that interest rate has been changed to 17% without any notice to the complainant. The loan agreement has been placed on the record by the complainant himself as Ex. C-1, which shows adjustable interest rate as FRR as published/notified from time to time plus margin of 1.5% equal to 14.25%. This fact was also not denied by the counsel for the complainant. Therefore, the order so passed by the learned District Forum while giving directions to the Ops not to charge interest more than 12.75% is incorrect and require modification.
  9. The next question arises whether the OP can charge enhanced FRR and what is the method to charge that rate of interest in case there is increase in FRR. In the appeal file, the counsel for the Ops have placed on the record one application in which he has describe the change in the FRR from time to time, which reads as under:-

 

With effect from Rest Date Old FRR New FRR Margin Add % Applicable Rate of Interest
30-Jun-08 7.1.2008 12.75 13.5 1.5 15
31-Jul-08 8.1.2008 13.5 14.25 1.5 15.75
31-Dec-08 1.1.2009 14.25 13.75 1.5 15.25
22-Apr-09 5.1.2009 13.75 13.25 1.5 14.75
4-Jun-09 7.1.2009 13.25 12.75 1.5 14.25
18-Aug-10 9.1.2010 12.75 13.25 1.5 14.75
6-Dec-10 1.1.2011 13.25 13.75 1.5 15.25
3-Jan-11 2.1.2011 13.75 14 1.5 15.5
24-Feb-11 3.1.2011 14 14.5 1.5 16
7-May-11 6.1.2011 14.5 15 1.5 16.5
4-Jul-11 8.1.2011 15 15.25 1.5 16.75
13-Aug-11 9.1.2011 15.25 15.75 1.5 17.25
23-Apr-12 5.1.2012 15.75 15.5 1.5 17
23-Aug-13 9.1.2013 15.5 15.75 1.5 17.25

Therefore, there is increase in FRR from time to time. A reference  can be made to the judgment dated 7.7.2008 passed by the Hon’ble National Commission in C.C. No. 51 of 2007 “Awaz, Punita Society, Ambawadi, Ahmedabad versus Reserve Bank of India” wherein question arise whether RBI can issue any directions with regard to rate of interest to the other banks. Role of the RBI has been mentioned under Section 35-A of the Banking Regulation Act, 1949, which provided as under:-

“35-A. Power of Reserve Bank to  give  directions.—  (1)  Where the Reserve Bank is satisfied that –

  • in the public interest; or (aa)  in the interest of banking policy; or
  • to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or
  • to secure             the        proper            management                   of       any         banking company generally,

it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

(2)  The Reserve Bank may, in representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancellation shall have effect.”

and that question came up for consideration before the Hon’ble Apex Court in the case “Central Bank of India Vs. Ravindra & Ors.”, (2002) 1 SCC 367 wherein the Hon’ble Supreme Court observes as under:-“50. Though we have answered the question of law before us, but we cannot leave the matter at that alone without sounding notes of caution, lest our view of the law should be misconstrued and misapplied. Before we do so, it would be appropriate to refer to the decision of this Court in ‘Corporation Bank v. D.S. Gowda’ in some detail.

  1. The Banking Regulation Act, 1949 empowers  the  Reserve Bank, on it being satisfied that it is necessary or expedient in the public interest or in the interest of depositors or banking policy so to do, to determine the policy in relation to advances to be followed by banking companies generally or by any banking  company in  particular  and  when  the  policy  has been so determined it has a binding effect. In particular, the Reserve Bank of India may give directions as to the rate of interest and other terms and conditions on which advances or other financial accommodation may be made. Such directions are also binding on every banking company. Section 35-A also empowers the Reserve Bank of India in the public interest or in the interest of banking policy or in the interests of depositors (and so on) to issue directions generally or in particular, which shall be binding with effect from 15-2-1984. Section 21-A has been inserted in the Act, which takes away power of the court  to reopen a transaction between a banking company and its debtor on the ground that the rate of interest charged is excessive. The provision has been given an overriding effect over the Usury Loans Act, 1918 and any other provincial law in force relating to indebtedness.”
  1. In para No. 55 of the judgment, it was further observed as under:-“(5) The power conferred by sections 21 and 35-A of the Banking Regulation Act, 1949 is coupled with duty to act. The Reserve Bank of India is the prime banking 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 the public in general and preventing banking affairs from deterioration and prejudice as also to secure the proper management of any banking company The 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 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 the 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 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 directives may be treated as standards for the purpose of deciding whether the interest charged is excessive, usurious or opposed to public policy.and ultimately, the Hon’ble Apex Court laid down the law as under:- “(a)      the  Apex Court  has  noticed instances  of unscrupulous, unfair and unhealthy dealings without generalising the same. The Court has specifically observed that instances of unscrupulous, unfair and unhealthy dealings can be multiplied. But such issues are left open to be adjudicated upon in appropriate cases as and when they actually arise for decision. The present case is an instance of charging usurious rate of interest, which is unfair trade practice.
  • The Banking Regulation Act, 1949 empowers the Reserve Bank to lay down the policy in the public interest and it has binding effect on the banks. The Reserve Bank of India is entitled to give directions as to rate of interest to be charged and other terms and conditions on which advances or other financial accommodation may be made.
  • The power conferred by sections 21 and 35-A of the Banking Regulation Act, 1949 is coupled with the duty to act. The Apex Court considered the RBI as a watchdog of finance and economy of the nation, and presumed that it ought to be aware of the relevant factors including the prevailing credit conditions, which would invite its policy
  • Charging of interest should be reasonable. Further, penal interest can be charged only once for one period of default and, therefore, cannot be permitted to be capitalized. It would be opposed to public
  • The Court has specifically stated that unscrupulous banks may resort to charging of interest even on monthly rests. It is, therefore, required to be clarified that such unscrupulous banks should not be permitted to charge interest on credit cards on monthly
  • The Court has observed that most of the banks press into service long-running documents wherein the borrowers fill in the blanks, at times without caring to read what has been provided therein, and bind themselves by the stipulations articulated by the best of legal brains. In our view, such practice also would be an unfair trade
  • Further, despite our repeated suggestion, the learned Counsel for the RBI failed to find out what could be considered as usurious  rate of interest  on the basis  of  which the RBI had issued circulars to banks. There was no response except to say that with regard to rate of interest RBI has deregulated the same.”
  1. This RBI has issued its circulars from time to time, how the rate of interest is to be charged. In its circular No. DBOD.Dir.BC.5/13.03.00/2006-07 dated 1.7.2006, the loans  up  to Rs. 2 lakh carry the prescription of not exceeding the Benchmark Prime Lending Rate (BPLR) and on loans above Rs. 2 lakh, banks  are free to determine the rate of interest subject to BPLR and spread guidelines. In the same circular dated 1.7.2006, it has been mentioned how the interest rate of loans are to be fixed, is referred as under:-

“Banks have the freedom to offer all categories of loans on  fixed or floating rates, subject to conformity to their Asset- Liability Management (ALM) guidelines. In order to ensure transparency, banks should use only external or market-based rupee benchmark interest rates for pricing of their floating rate loan products. The methodology of computing the floating rates should be objective, transparent and mutually acceptable to counterparties. Banks should not offer floating rate loans linked to their own internal benchmarks or any other derived rate based on the underlying. This methodology should be adopted for all new loans. In the case of existing loans of longer /fixed tenure, banks should reset the floating rates according to the above  method  at  the  time  of  review  or  renewal  of  loans accounts          after         obtaining                the           consent  of             the      concerned borrower/s.”

Therefore, whenever there is any change in the floating rate, it should be in conformity to Asset-Liability Management (ALM) guidelines and in the case of existing loans for longer/ fixed tenure, the Banks should re-fix the rates according to the abovesaid method after obtaining the consent of the concerned borrower. The same provision was retained in the Circular dated 1.7.2009 and in the Circular dated 1.7.2010 as well as in the Circular dated 2.7.2012. The complainant was advanced the loan on floating rate of interest. In case there was change in the floating rate of interest on loans then the abovesaid formula was to be adopted, while fixing the rate and taking the consent of the concerned borrower whether he wants to continue the loan with the enhanced rate of interest or he could adopt for other option i.e. closing of the account or shifting of the account, therefore, information/consent of the borrower is the predominant clause while changing the floating rate of interest. In the certificate of interest, which the Ops has placed on the record with regard to the change of floating FRR from time to time, no reference of conformity to their Asset-Liability Management (ALM) so that it should be objective transparent and mutually accepted to counter (concerned) parties. The OPs in their written reply has stated in para No. 4 of their reply on merits that same was published on the website of the Bank and informed the customer at large through the newspaper, therefore, there are no pleadings whether any personal notice was delivered upon    the    complainant    to    check    transparency    and mutually acceptable, therefore, the Ops bank has not complied with the RBI instructions with regard to change in the floating rate of interest of loans. In another judgment Hon’ble National Commission reported in 2012(4) CPJ 415 (NC) “IDBI Bank Ltd. (M/s) versus Subhash Chand Jain & Anr.” In which it was again observed that concept of floating rate of interest flows from the regulation of rate of interest by the RBI guidelines and not arbitrarily by the service provider without informing or telling the reasons for increasing the rate of interest in general terms and not that there is inflationary market. Every discretion has to be exercised judicially so as to make persons understand fully as to the reasons and ground for increasing the rate of interest and not arbitrarily under the garb of floating rate of interest.

  1. The counsel for the appellants/OPs have referred to the judgment dated 24.5.2011 passed by the Hon’ble State Consumer Disputes Redressal Commission, U.T., Chandigarh in First Appeal No. 382 of 2009 titled as “Birbhan Goyal versus ICICI Bank Ltd.” that the parties are bound by the terms and conditions contained in the loan agreement. On the same point, he has also referred to the judgment of the Hon’ble Apex Court reported in II(1994) BC 613 (SC) “Corporation Bank versus S. Gowda and Anr.” Wherein it was observed that Courts are precluded from subjecting transactions entered into between banks and borrowers from scrutiny. They cannot reopen any account maintained by the Bank relating to transaction with its customers. However, if rate of interest is in violation of the RBI directions then Courts disallow such excess interest and can give relief to party.
  2. So far as basic agreement is concerned, we are in agreement with the judgments referred above that we cannot change the basic rate, which was agreed between the parties and in the judgment “Corporation Bank versus S. Gowda and Anr.”(supra), it has been clearly mentioned by the Hon’ble Supreme Court that in case interest is charged in violation of the RBI guidelines then the Courts can give relief.
  3. Here also in case the Ops had increased the floating rate of interest arbitrarily without any notice to the complainant whether it was mutually acceptable to him and no consent was taken as is required as per the guidelines of the RBI referred above and there was transparency in the change of FRR rate by the Op as the certificate of interest does not reveal whether it was in conformity to their Asset-Liability Management (ALM) till there was no transparency while fixing the FRR as per the guidelines given by the RBI then any change in that rate cannot be applied to the customers without notice to him and without his consent. Therefore, change of rate of interest from 14.25% to 17% and extend the period of EMIs from 180 months is arbitrary on the part of OPs, which increased rate of interest cannot be sustained in view of our above
  4. In view of the above discussion, we partly accept the appeal. The order of the learned District Forum is modified to the extent that instead of 12.75%, it be read as 14.25%. Other terms of the order of the District Forum will remain as it
  5. The appellants had deposited an amount of Rs. 7,500/- with this Commission at the time of filing the This amount of Rs. 7,500/- with interest accrued thereon, if any, be remitted by the registry to the respondent by way of a crossed cheque/demand draft after the expiry of 45 days, from the despatch of the order to the parties; subject to stay, if any, by the higher Fora/Court.
  6. Remaining amount shall be paid by the appellants to the respondent within 30 days from the receipt of the copy of the
  7. The arguments in this appeal were heard on 28.5.2015 and the order was reserved. Now the order be communicated to the parties as per
  8. The appeal could not be decided within the statutory period due to heavy pendency of Court

 

(Gurcharan Singh Saran) Presiding Judicial Member

 

 

June 8, 2015.                                                                                                (Surinder Pal Kaur)

as                                                                                                                                  Member

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