Facts Of The Case:
The appellant (K . Pushpangadan) took a loan for agricultural purposes from the bank. He files a suit for recovery of the money advanced by the bank. As per the terms of the loan, the amount was repayable on demand within twelve months in a lump sum with interest at 16.5% at quarterly rests. As a security for the advance, the appellant executed a demand promissory note in favor of the bank. He also executed a hypothecation agreement in favor of the bank.

A collateral security was also offered as an equitable mortgage in respect of the scheduled property by depositing the title deed. According to the appellant, the action of the bank in charging interest at the rate of 16.5% per annum was unauthorized and illegal.

K. Pushpangadan V. Federal Bank Ltd (2000) 101 Comp. Case 197( Kar.)
Equivalent Citation: 1999 SCC Online KER 146
AIR 1999 KER 421
(1999) 3 KLT 619
(2000) 101 Comp Case 197
Bench: Karnataka High Court
Appellant : K. Pushpangadan
Respondent: Federal Bank Ltd
Date of Judgement: July 1, 1999
Hon'ble Judges / Coram: A.S. Venkatachala Moorthy and C.S. Rajan
Case Category: This case is about the recovery of money from a bank that charges excessive interest on agricultural loans.
Relevant Sections: Section 21 and Section 21A of the Banking Regulation Act, 1949

Issues:
Whether the section 21A of the Banking Regulation Act is a restraint on the power of the court to reopen any amount maintained by a bank on the grounds of excessive interest rates?

Contentions Of The Appellant:

1. The appellant contended in his written statement that the action of the bank in charging interest at the rate of 16.5% per annum was unauthorized and illegal.
2. The directions issued by the Reserve Bank of India to the scheduled banks in the matter of charging interest for loans are binding on the bank.
3. That the argument to pay interest at the rate of 16.5% per annum is opposed to public policy.
4. The Directions issued by the Reserve Bank of India are statutory and therefore the bank must abide by them.
5. The appellant contended that the loan advanced is a term loan coming within Item 6 of Ext A12 circular and as such the bank can claim interest only at the rate of 12.5%.
6. That the bank is not entitled to claim penal interest at the rate of 12.5%.
7. According to the appellant, there was a time for him to pay the amount and the bank is not entitled to claim penal interest from the very beginning itself.
8. That the Bank is not entitled to claim interest based on quarterly rests.

Contentions Of The Respondent( Bank):

• The bank contended that the loan advanced to the appellant is a short-term agricultural loan exceeding Rs 25000/- as provided in Item 3 of Ext A12 circular and as such the revised rate of interest is 16.5%.
   
• That the loan originally granted is repayable within twelve months. The period of repayment of the loan was extended by mutual agreement between the parties as per Ext A5 and A6. It was a clear default on the part of the appellant. Thus the bank was entitled to claim penal interest.

Referred Cases By Karnataka High Court:

1. D.S. Gowda v. Corporation Bank (AIR 1983 Kant 143)
   In this case, banks are bound by the directive and circulars issued by the RBI, Section 21 of the Banking Regulation Act, 1949 provides that such directives could be issued in the public interest in the interest of depositors, or the interest of banking policy. Circulars are not only statutory directives but also statutory instruments of national policy.
    
2. Bank of India v. Karnam Ranga Rao 1988 Com Cas 477 (AIR 1986 Kant 242)
   In this case, Section 21 A of the Banking Regulation Act, 1949 is a restraint on the power of the court to reopen any account maintained by the bank on the ground that the rate of interest charged is excessive or unreasonable.
    
3. H.P. Krishna Reddy v. Canara Bank, Bangalore, (AIR 1985 Kant 228)
   In this case, a transaction between a Banking Company and its debtor shall not be reopened by any court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.
    
4. Thampan v. Dhanalakshmi Bank Limited 1989 (2) Kant LT 840 (sic)
   In this case, Section 21A of the Banking Regulation Act cannot be legally understood as a provision restraining the courts from exercising its powers to give relief to a party whenever any bank claims anything in violation of the circulars issued under Section 21 of the act.
    
5. Corporation Bank v. D.S. Gowda (1994) 5 SCC 213 : (1994 AIR SCW 2721)
   In this case, if the Reserve Bank keeping in view the economic scenario of the country and the impact that interest rates would have on the economy fixes the minimum and the maximum interest rates that banks can charge on loans/ advances the same cannot be termed to be unreasonable or excessive.
    
6. State Bank of India v. Yasangi Venkateswara Rao, AIR 1999 SC 896 (1999 AIR SCW 568)
   In this case, the Supreme Court upheld the constitutional validity of S.21A of the Banking Regulation Act, of 1949.
   

Judgement By Karnataka High Court:

• The borrower did not specifically contend in his written statement that the interest charged was excessive but merely contended that the bank was not admitted.
• He had shifted ground on what was the principal sum and interest which went to make the total of Rs 5,00,000/- Admittedly he had not paid a farthing towards the loan or interest till the date of the execution of the mortgage. This shows he was a bad paymaster.
• The property was still under construction and did not yield any income on the date of the mortgage so it could not be said that the security was sound. True it is that in his re-examination he came out with a statement that the property was worth Rs. 20-25 lakhs.
• However, the value of the property at the date of the mortgage is relevant for which there is no evidence. The benefit of the rise in value will be to the borrower but that subsequent fact cannot help in evaluating the risk factor at the date of the mortgage. Admittedly at no point in time, not even at the time of confirmation of balance did he protest that the interest charged was excessive.
• He went to the length of saying: 'Even now I cannot say what is excessive interest'. That is because he never bothered to repay any part of the loan nor did he attempt to pay interest.
• He was indifferent. He showed no evidence to show that the prevailing market rate was lower than the interest charged by the Bank. Nor is it shown that any other bank would have charged less.
• There is no mention of deposit rates etc. in his written statement or oral testimony on which the High Court has based its opinion.
• If the parties agree that concerning the amount advanced specific rates of interest would be paid, it may not be proper for the Court to interfere and reduce the amount of interest agreed to be paid by the parties.
• The Court must always give utmost respect and sanctity to the contracts entered into between the parties. The contracts entered into between the parties can be held to be illegal or void only if it is against any statutory provisions or any public policy.

Conclusion:
When Section 21A of the Banking Regulation Act specifically states that the Court should not reopen the transactions on account of excessive interest, it may not be proper on the part of the Court to rewrite the contract and hold that one of the parties is entitled to avoid the contract in the matter of payment of interest.

When the Supreme Court holds that Section 21A applies to all types of loans which are granted by Banks, whether to agriculturists or non agriculturists, it is difficult to accept the argument of the appellant that only lesser interest is payable by him in this case. Under these circumstances, the court is unable to accept the contention of the appellants. They do not find any illegality in the decree and judgment of the lower Court.

The appeal is therefore dismissed.