Should Banks Inform Borrowers About Changes In Interest Rates, Give Annual Loan Statements? Supreme Court Asks RBI
The Supreme Court of India on Monday (September 11) requested the Reserve Bank of India (RBI) to submit an affidavit clarifying its directives concerning banks’ obligations to borrowers. Specifically, the court sought answers to three key questions: whether banks are required to provide borrowers with signed loan documents, if they must inform borrowers about changes in interest rates,...
The Supreme Court of India on Monday (September 11) requested the Reserve Bank of India (RBI) to submit an affidavit clarifying its directives concerning banks’ obligations to borrowers. Specifically, the court sought answers to three key questions: whether banks are required to provide borrowers with signed loan documents, if they must inform borrowers about changes in interest rates, and whether the lenders are under an obligation to furnish borrowers with annual statements of their loan accounts.
A bench of Justices Sanjiv Khanna and SVN Bhatti was hearing a special leave petition filed by the Punjab National Bank against an August 2022 decision of the Punjab and Haryana High Court quashing a demand notice issued by a bank to a manufacturing company under 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, seeking to recover over 28 lakhs. Besides this, the high court directed the bank to reclassify the borrower’s non-performing asset (NPA) account as standard and adjust the interest ‘wrongly and excessively charged’ against the outstanding amount claimed. A division bench of Justices MS Ramachandra Rao and Harminder Singh Madaan also imposed a cost of one lakh on the lender.
The apex court on Monday stayed this judgment as well as the contempt proceedings arising out of it, while questioning the ruling’s precedential value. The Justice Khanna-led bench also allowed the SARFAESI proceedings and the bank’s recovery suit before a debt recovery tribunal in Chandigarh to continue while the court heard this matter. Not only this, it framed three questions for the Reserve Bank to answer in an affidavit.
PNB was represented by Advocate Divyanshu Sahay assisted by Advocate Akshay Sahay and its plea was filed through Advocate-on-Record Shradha Narayan. The central legal question posed by the appellant-bank was whether a high court could invoke its Article 226 powers to direct a demand notice to be quashed, an NPA account to be reclassified as standard, or a refund of interest to be paid to the borrower.
The bank argued that in matters relating to debt recovery, the high court ought not to supplant itself in place of the designated decision-making authority, especially when the controversy over the alleged overcharging of interest was a ‘pure question of fact’ and the grievances raised in the writ petition could have been addressed within the debt recovery tribunal (DRT) proceedings. The tribunal, it was asserted, should be entrusted with addressing issues of fact and law, including any statutory violations. Apart from this, the Punjab National Bank also insisted that it had charged interest strictly as per RBI circulars issued from time to time.
The lender alleged that the high court’s ruling was counter-productive and against the larger public interest, since it could paralyse the entire debt recovery system by introducing uncertainty in the banking industry –
“The Bank’s right to recover debt due to it from a defaulting borrower by invoking Section 13(2) of the SARFAESI Act, 2002 or by proceeding under Section 19(2) of the Recovery of Debts and Bankruptcy Act, 1993 by filing recovery suit before the tribunal cannot be bypassed by invoking Article 226 of the Constitution…The Supreme Court has also categorically and consistently held in various cases that when a statute prescribes a particular mode of grievance redressal, a writ court shall not encourage an attempt to circumvent the same…Thus, the impugned judgment is wholly unjustified. It will paralyse the entire debt recovery system because such kinds of judgments lead to uncertainty in the entire banking industry.”
Case Title
Branch Manager, Punjab National Bank & Ors. v. Guru Nanak Engineering Works & Ors. | Diary No. 2477 of 2023