Background

The increase in the volume of litigation between the Banks / Financial Institutions and borrowers relating to financial agreements and issues arising therefrom is attributable mostly to variation in lending rates and notice with respect to the same and / or the dispute whether the borrower’s loan account can be settled at a particular rate of interest.

Although the issue whether there is any requirement in law or otherwise on Banks / Financial Institutions to individually notify borrowers, as and when there is a variation in the bank’s lending rate, is highly contested between parties across Courts / Consumer Fora, there is no uniform view so as to settle the issue. Courts / Consumer Fora have also given conflicting views regarding the issue of settlement of borrowers’ loan account at a particular rate of interest.

Dispute

The borrowers under the financing agreements have the option to avail the loan either under the ‘Fixed Rate Category’ or under the ‘Flexible / Floating / Adjustable Rate Category’. While the lending rate is fixed for the entire term of loan under the former category, the same keeps on varying under the latter category, consequent to change in Banks’ Prime Lending Rate (“PLR”), which is re-set quarterly in view of various factors inter alia including cost of funds, operating expenses and a minimum margin to cover regulatory requirement of provisioning / capital charge and profit margin.

Given the structure of the financing agreement, consequent to change in Banks’ PLR, there is a corresponding change in the banks’ lending rate. Therefore if the Banks’ PLR increases the rate of interest at which the borrower has to repay the loan is bound to increase. Therefore, if the rate of interest increases the banks either have the option to increase the amount of EMI payable by the borrower or increase the volume / quantum / number of EMIs payable. As a matter of practise, since banks had obtained in advance signed cheques as guarantee of payment from the borrower, it is not advisable to increase the amount of EMI (as the cheques would then be dishonoured) and therefore the industry practise is to increase the number of EMIs, thereby extending the period of loan.

The neat issue of dispute between the borrowers and banks is the requirement or absence thereof, of personal notice to individual borrower on each occasion when the lending rate is increased (assuming a borrower won’t complain if the lending rate is reduced), on account of which the term of loan is increased as number of EMIs are enhanced. The borrowers allege deficiency in service and unfair trade practice on the part of banks / financial institutions on the ground that the latter did not issue any notice while increasing the lending rate. Based on the above, reliefs are sought that the banks be directed to settle the loan account of the borrower at the rate which existed as on the date of execution of the financing agreement.

No Uniform View

While in some cases Courts / Consumer Fora have taken a view that banks cannot charge the borrower at the increased rate of interest unless notice is given to the said borrower regarding such increase[1], in some cases there is a view expressed that consent of the borrower recorded at the time of execution of the financing agreement is sufficient notice for the entire term of the loan[2].  There is also a divergent view on the issue as to whether the financing agreements should be treated as final and binding[3] or whether the said agreements are not binding on the ground of being standard form of contract which are not negotiated[4]. There are also divergent views on the jurisdiction of Courts / Consumer Fora to direct settlement of loan account of the borrower at a particular rate[5], which is clearly contrary to the mandate prescribed by the Reserve Bank of India (“RBI”).

Therefore there are divergent views on the following issues:

  1. Whether Courts / Consumer Fora can hold the banks / financial institutions liable for deficiency in service on the ground that the bank did not give personal notice to the borrower on each occasion when there was a variation in the lending rate?
  2. Whether Courts / Consumer Fora in given cases can direct the banks / financial institutions to settle the loan account of the borrower at a particular rate of interest?

 

Sufficient Material Available For Guidance

An analysis of the Banking Regulation Act, 1949, Master Circulars issued by the RBI in exercise of powers conferred under the said Act, Judgments of the Hon’ble Supreme Court and of the National Consumer Disputes Redressal Commission on the issue clearly suggest that a firm view can be taken as under:

  1. Banks / Financial Institutions cannot be held liable for deficiency of service on the ground of not giving personal notice to the borrowers on each occasion when there was a variation in the lending rate, as long as the banks notify the borrowers regarding such change by way of public notice;
  2. Courts / Consumer Fora cannot direct the banks / financial institutions to settle the loan account of the borrower at a particular rate of interest as the same is not permitted in law.

Basis for the aforesaid

  1. There is no provision under the Banking Regulation Act, 1949, which casts an obligation on the Banks/Financial Institutions to notify each borrower personally on each occasion when there is a change/ variation in the lending rate, as a result of change in the bank’s PLR;
  2. The Hon’ble Supreme Court of India in Syndicate Bank vs. R. Veeranna & Others [(2003) 2 SSC 15] has held that if the borrower has accorded its consent at the time of execution of the financing agreement to the rate of interest being variable/ floating/ adjustable, then the bank is at liberty to charge the borrower with the increased rate as and when the same is increased on account of increase in bank’s PLR and there is no requirement/ obligation on the bank to seek the borrowers’ consent on each occasion. Clearly, the Supreme Court has indicated that the consent recorded at the time of execution of the financing agreement, towards the category of loan, is sufficient notice to the borrower that the lending rate will vary depending upon the change in the Bank’s PLR and that there is no requirement of giving repeated notice to the borrower on each occasion;
  3. The Hon’ble Supreme Court in ICICI Bank Ltd.  Vs. Maharaja Krishan Datta & Others [2015 (8) Scale 623] has held that Courts / Consumer Fora should not change /alter the terms of the financing agreement executed between the parties, particularly when there is nothing on record to suggest that the said agreements are in violation of any mandate prescribed by the RBI. The Hon’ble Supreme Court has further held that the bank should be permitted to perform its obligation in accordance with the said agreements and issuance of directions which amount to re-writing the terms of the agreement should be avoided as the same render the agreement as nugatory and otiose. 
  4. That the  terms of the financing agreement are therefore critical and decisive to infer as to whether the borrower has been put to notice regarding the category of interest rate and as to whether the said rate is liable to change as a result of change in Bank’s PLR. The terms of the financing agreement are also critical to decipher as to whether the banks have taken upon them an additional burden to give personal notice to the borrower or not. Therefore Courts / Consumer Fora should honour the said agreements and while adjudicating disputes should not re-write a fresh agreement.
  5. That, if the Banks / Financial Institutions notify the borrowers by way of public notice on their respective websites, the same should be treated as sufficient notice to the borrowers in law, unless there is an express agreement to the contrary.
  6. That the RBI vide its Master Circular dated 03.11.2008[6] has recognized the aforesaid practice and has expressly permitted the banks to make the necessary information relating to their lending rates and variation in respect thereof available on their websites. The RBI has further given liberty to the banks to either follow the prescribed format of notice or devise their own format to inform the borrowers. The RBI has recognized the practise of publication of notice on website as an effective channel for reaching out to the customers and public at large and has opined that such disclosures increase transparency in operations.
  7. Even otherwise having regard to the volume of borrowers and the corresponding volume of financing agreements, the banks cannot be expected to notify each borrower personally on each occasion when there is a variation in bank’s lending rate, consequent to variation in Bank’s PLR. Adopting a view that the banks should notify each borrower personally would have large cost implications on the banks. The said view would also open floodgate for litigation, inasmuch as the borrowers will have a cause of action to allege deficiency against the bank in the event the bank fails to issue a single intimation.
  8. Further, the view that Courts /Consumer Fora, can direct the banks to settle the loan account of the borrower at a particular rate of interest is ex-facie contrary to the mandate of Section 21 A of the Banking and Regulation Act, 1949 which provides that a transaction between a banking company and its debtor shall not be re-opened by any Court on the ground that the rate of interest charged by the banking company is excessive. Typically the borrowers while seeking the said relief allege that the banks cannot be permitted to charge interest at the increased rate on the ground that there was no notice regarding such increase and Courts / Consumer Fora pass orders directing settlement of loan accounts, which essentially amounts to re-opening the transaction afresh. There is a tendency to pass such orders even in cases where there is no material to suggest that the rate charged is contrary to the mandate prescribed by RBI.
  9. That such Orders are also not tenable in view of the fact that the RBI post 18.10.1998 has de-regulated the interest rate on loans exceeding INR 200,000 lacs and that the banks are at liberty to determine the lending rates having regard to their PLR and margin available to the borrower. That orders directing settlement of loan account at a particular rate clearly are contrary to the RBI’s mandate, giving autonomy to commercial banks to determine lending rate.
  10. It is reasonable to argue that such orders may be passed in cases where there is sufficient material to suggest that the interest rate is otherwise bad / excessive on cogent grounds and where the financing agreement is expressly challenged, but not as a matter of routine.

 

Conclusion

In view of the aforesaid, it is plausible to contend that Courts / Consumer Fora cannot take a view that the banks are liable for deficiency of service, in case they do not notify each borrower personally on each occasion when there is a variation in lending rate, as long as the said bank follows the practice of notifying the borrowers by way of public notice made available/ accessible on its website.

It is further plausible to contend, that orders requiring the banks to settle the loan account of the borrowers at a particular rate of interest are bad on the ground that the same are contrary to the mandate prescribed by Section 21A of the Banking Regulation Act, 1949 and the Master Circular issued by the RBI, de-regulating the interest rate on loans exceeding INR 200,000.