Sole Proprietorship Cannot Be Classified As “Individual Borrowers” As Per RBI Guidelines: NCDRC

Brief Facts of the Case

The complainants applied for a business loan, with HDB Financial Services/finance company, resulting in the disbursement of ₹4,00,00,000. The repayment was to be made in 120 monthly installments at a floating interest rate. However, it was later discovered that only 116 installments were paid. The complainants consistently made all monthly payments and, after a decrease in the interest rate, decided to repay the loan in a lump sum while seeking financing from another institution. They requested the finance company to accept a lump sum payment of ₹3,93,66,053.87 as full settlement of the loan. The finance company allegedly agreed but then imposed a prepayment penalty of ₹17,00,851.40, which the complainants argued was arbitrary and contrary to Reserve Bank regulations that prohibit penalties for early repayment. Consequently, the complainant approached the District Forum and sought a refund of the prepayment fee, along with 18% interest per annum, ₹2,00,000 in compensation, and ₹75,000 for litigation expenses from the finance company. The District forum partly allowed the complaint following which the finance company appealed to the the State Commission of Rajasthan. The State Commission dismissed the appeal, leading the finance company to file a revision petition before the National Commission.

Contentions of the Opposite Party

The insurer argued that the impugned orders misinterpreted the loan agreement, particularly regarding prepayment charges. They highlighted that the complainant had not objected to these charges when signing the agreement, implying acceptance of the terms. Furthermore, the insurer noted that the loan was for business purposes, exempting it from the Reserve Bank of India's prohibition on prepayment charges for individual borrowers. As a proprietorship, the complainant did not qualify as a 'consumer' under the relevant Act, and thus, the complaint should have been dismissed. The insurer emphasized that prepayment charges are standard to mitigate potential losses and are consistent with the loan agreement and applicable RBI guidelines. Ultimately, the insurer contended that the judgments were based on misrepresentations by the complainant, failing to appreciate the terms of the agreement and relevant regulations.

Observations by the National Commission

The National Commission observed that the complainant, a proprietorship, had borrowed ₹4,00,00,000 from the finance company, agreeing to repay it in 120 months, with all installments paid punctually. The central issue was whether the complainant could be classified as an 'individual borrower' to exempt them from prepayment charges per relevant RBI circulars. In S. Manoharan v. Reserve Bank of India, the Madras High Court ruled that a loan obtained under the name of a business, represented by its sole proprietor, does not qualify the borrower as an “individual borrower” according to RBI guidelines. The court emphasized that while the 2019 RBI circular allowed for co-obligants to be considered “individual borrowers,” it did not extend this classification to sole proprietorships. It maintained that any expansion of the definition of “individual borrowers” falls under the jurisdiction of the Reserve Bank of India and not the courts, particularly regarding waivers of prepayment charges that were already stipulated in the signed loan document. The commission noted that the complainant's loan agreement explicitly included provisions for prepayment charges, which were mutually agreed upon. Since the loan was taken in 2015, and the RBI circular prohibiting prepayment charges was issued in 2019, any regulatory changes cannot retroactively alter contractual obligations unless explicitly stated. Therefore, the commission allowed the revision petition and set aside the orders of the District Forum and State Commission.

Case Title: HDB Financial Services Ltd Vs. M/S. Somanis & Anr.

Case Number: R.P. No. 1065/2021

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