Pre closure charges charged by bank are valid?

LAWYER ASSOCIATES (Querist) 20 January 2020 This query is : Resolved
Whether preclosure charges charged by bank on pre closure of loan amount is valid in the eyes of law?

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Banks are generally not permitted to charge foreclosure or prepayment fees on floating rate term loans for individual borrowers, according to Reserve Bank of India (RBI) guidelines and Supreme Court clarifications. If a bank has wrongly charged such fees, you can serve a notice for a refund with interest, file a complaint with the Banker's Ombudsman, or pursue a consumer complaint.

Raj Kumar Makkad (Expert) 20 January 2020
No. This is not valid. Hon'ble Supreme Court of India has clarified this in various judgments. Even RBI has also clarified this time and again that foreclosure charges for the closure of the loan amount cannot be charged by any banker.

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LAWYER ASSOCIATES (Querist) 21 January 2020
But they are charging it, Now what is solution for it?

Raj Kumar Makkad (Expert) 21 January 2020
Serve a notice to the banker and claim the refund of such wrongfully charged amount with interest failing which to make a complaint to Banker's Ombudsman and even if no solution is made out, file a consumer complaint befoe District Consumer Disputes Redressal Forum.

Raj Kumar Makkad (Expert) 21 January 2020
Calcutta High Court (Appellete Side)
Devendra Surana vs Bank Of Baroda & Ors on 12 December, 2018
1

W.P. No. 5521 (W) of 2017
IN THE HIGH COURT AT CALCUTTA
Constitutional Writ Jurisdiction
Appellate Side
Devendra Surana
Vs.
Bank of Baroda & Ors.

For the Petitioners : Mr. Shuvasis Sengupta, Advocate
Mr. Bishwajib Ghosh, Advocate
Mr. Avirup Chatterjee, Advocate
Mr. Balarko Sen, Advocate

For the Respondent Nos. : Mr. Somdutta Basu, Advocate
1 to 3 Hearing concluded on : December 5, 2018 Judgment on : December 12, 2018 DEBANGSU BASAK, J.:-

The petitioners have sought for a direction upon the bank to release collateral securities and issue a 'no due' certificate in favour of the petitioner without imposing any foreclosure/prepayment charges and/or penalties.

Learned Advocate appearing for the petitioner has submitted that, the petitioner as the sole proprietor is carrying on business under the name and style of Magnum Industries. The petitioner had obtained credit facilities from the respondent no. 1 in terms of the sanction letter dated January 15, 2016. The petitioner had foreclosed the credit facilities. Upon such foreclosure being sought to be made, the bank had unjustifiably claimed foreclosure charges. The industrial unit of the petitioner being classified as small scale by the State of Assam and the petitioner being an individual borrower under the relevant guidelines issued by the Reserve Bank of India, the respondent no. 1 is not entitled to levy any foreclosure charges. In support of such contention learned Advocate for the petitioner has relied upon a Circular dated May 7, 2014 issued by the Reserve Bank of India.

Learned Advocate for the petitioner, in his usual fairness has drawn the attention of the Court to All India Report 2018 Calcutta page 185 (M/s. SPPL Hotels Pvt. Ltd. & Anr. v. Allahabad Bank & Ors.) and has submitted that, the decision of rejection of the writ petition therein assailing the imposition of prepayment charges on such petitioner prepaying the credit facilities, is not attracted in the facts of the present case. The terms and conditions of the sanctioned credit facilities obtaining in the present writ petitioner are different to that obtaining in M/s. SPPL Hotels Pvt. Ltd. (supra). Relying upon 2016 Volume 11 Supreme Court Cases page 720 (Gangotri Enterprises Limited v. Union of India & Ors.) he has submitted that, the unadjudicated claim for damages, for breach of contract does not amount to money due until adjudicated and ordered by a Court. Therefore, the bank cannot act as the claimant, adjudicating authority as also the executing authority in respect of any claim that the bank may have on a borrower. He has drawn the attention of the Court to the subsisting interim order dated March 17, 2017 and has submitted that, if the Court is please to grant the relief as prayed for in prayer a of the writ petition, then, the bank should also be directed to refund the sum of Rs. 13.35 lakhs kept in deposit by the petitioner with the bank in terms of such interim order along with interest accruing on such deposit. He has submitted that, the petitioner be granted the reliefs as sought for.

Learned Advocate appearing for the respondent no. 1 has submitted that, the petitioner cannot be treated as an individual borrower within the meaning of the RBI guidelines. He has submitted that, the petitioner cannot be treated as a consumer as, the petitioner had obtained the credit facilities for business purposes. The credit facilities being granted for commercial purposes, the petitioner cannot be treated as a consumer. Moreover, the credit facilities were granted in the name of the proprietorship firm. More so, the petitioner cannot be treated as an individual borrower. In support of his contentions that, an individual who has entered into business transactions cannot be treated as a consumer, learned Advocate appearing for the bank has relied upon 1995 Volume 3 Supreme Court Cases page 583 (Laxmi Engineering Works v. P.S.G. Industrial Institute), an unreported judgment and order dated July 31, 2015 passed in C.O. No. 1757 of 2008 (M/s. Sanjeev Kumar & Brothers v. The Calcutta Tramways Company (1978) Ltd. & Anr.) and a decision of the National Consumer Disputes Redressal Commission, New Delhi rendered in Consumer Case No. 2121 of 2016 (Dr. Hemant & Anr. v. M/s. Zenal Construction Pvt. Ltd. & Anr.).

The petitioner is a natural person. The petitioner has claimed that, it carries on business under the name and style of Magnum Industries as the sole proprietor thereof.

The petitioner has a manufacturing unit in Guwahati. The General Manager, District Industries and Commerce Centre, Kamrup, has issued a certificate dated September 21, 2011 categorising the enterprise of the petitioner to be 'small'. Subsequently, it appears that, such unit of the petitioner has been treated as a 'medium' unit since 2014.

The respondent no. 1 by a sanction letter dated January 15, 2016 had sanctioned four diverse fund based credit facilities in favour of the petitioner in the name of the sole proprietorship firm. The credit facilities are cash credit hypothecation of stocks and books debts and three term loans. The relevant term of the terms and conditions governing such credit facilities is as follows:-

"Pre-payment charges will be applicable @ 2.00% p.a. on the balance amount of Term Loan and for the residual period of pre-payment."

In consideration of the respondent no. 1 granting and continuing to grant the credit facilities, the petitioner had executed diverse banking documents in favour of the respondent no. 1. One of such documents executed is the general undertaking. By such document, the petitioner had agreed to allow the bank to charge penal interest at the rate of 2% above the rate applicable to cash credit amount on the entire outstanding in working capital facilities under the circumstances mentioned therein. The relevant clause of the general undertaking executed by the petitioner in favour of the respondent no. 1 is as follows:-

"9. To allow Bank to charge penal interest @ 2.00% above the rate applicable to Cash Credit A/C on the entire outstanding in Working Capital Facilities under the following circumstances:-

a) Default in repayment of loan instalments.

b) Non submission/delayed submission of quarterly operative statement and half yearly fund flow statement.

c) Non submission/delayed submission of monthly stock/book debts statements and other financial data.

d) Excess borrowing in the Cash Credit Account.

e) Default in borrowing covenants."

According to the petitioner, it had faced various difficulties in enjoying the credit facilities as sanctioned. According to the petitioner, the respondent no. 1 had delayed the sanction process and that, the rate of interest charged by the respondent no. 1 was much higher than the market rate. Apparently, the petitioner approached Standard Chartered Bank who had agreed to take over the credit facilities. Standard Chartered Bank had taken over the credit facilities from the respondent no. 1. It is during the process of such taking over of the credit facilities that, the respondent no. 1 had contended that, the petitioner was liable to pay prepayment charges. The petitioner had disputed such levy. The petitioner had thereafter filed the present writ petition.

In the present writ petition, an interim order was passed on March 17, 2017 requiring the petitioner to secure the prepayment charges claim of Rs. 13.35 lakhs. Upon such security being furnished, the bank was directed to make over the security documents and issue the 'no due' certificate. The petitioner had deposited the sum of Rs. 13.35 lakhs as directed by the Order dated March 17, 2017. The bank has also issued the 'no due' certificate and has released the security documents.

The fact scenario in SPPL Hotels Pvt. Ltd. (supra) is different to those obtaining in the present case. There, the borrower did not act in terms of the conditions of the sanction and therefore, was held to be disentitled to the benefit of waiver of prepayment charges. The borrower there was required to intimate the banker about its decision to foreclose within a stipulated period of time. The borrower was found not to have done so, therefore, becoming disentitled to the waiver of the prepayment charges. In the facts of the present case, the terms of the sanction does not require the petitioner to intimate the banker of its decision to foreclose within a stipulated period of time.

Applicability of the Reserve Bank of India circulars dated June 5, 2012, April 1, 2014 and May 7, 2014 have been questioned in the present writ petition.

Reserve Bank of India was considering reasonableness of bank charges from time to time. It had issued a circular dated February 2, 2007 in such context. By a circular dated June 5, 2012, Reserve Bank of India noted the requirement of abolishing foreclosure charges/prepayment penalty on home loans across the banking system to bring about an uniformity. It therefore directed that, the banks will not be permitted to charge foreclosures/prepayment penalties on home loans on floating interest rate basis with immediate effect.

In its first bi-monthly monetary statement of 2014-15 dated April 1, 2014, Reserve Bank of India was of the view that, consumer protection is an integral aspect of financial inclusion. It stated that, instead of levying penal charges for non-maintenance of money balance in ordinary savings bank accounts, bank should limit services available in such account to those available to basic savings bank deposit accounts and restore the services when the balance is improved to the level required. The banks were also requested not to levy penal charges for non-maintenance of minimum balances in any inoperative account.

Reserve Bank of India by its circular dated May 7, 2014 dealt with the levy of foreclosure charges/prepayment penalty on floating rate term loans. The circular referred to in Part B of the first bi-monthly monetary policy statement, 2014 announced on April 1, 2014. It noted that, such bi-monthly monetary policy statement indicated that, in the interest of the consumers, bank should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty. The Reserve Bank of India by such circular advised the banks that, they will not be permitted to charge foreclosure charges/prepayment penalties on floating rate term loans sanctioned to individual borrowers with immediate effect.

Therefore, at least with effect from May 7, 2014, banks are not entitled to charge foreclosure/prepayment penalties on floating rate term loan sanctioned to individual borrowers from such date notwithstanding the terms of the sanction.

It has been contended that, the petitioner being a sole proprietorship firm cannot be considered to be an individual borrower coming within the purview of the circular dated May 14, 2014.

A natural person and his sole proprietorship firm are the same legal entity. The liability of the sole proprietorship firm is that of the natural person carrying on business under its name. The sole proprietorship firm of a natural person and the natural person owning the firm do not enjoy the benefit of being treated as separate legal entities.

They are the one and the same legal entity. In the facts of the present case, although the loan was sanctioned in the name of a sole proprietorship firm, the natural person owning the sole proprietorship firm is liable. In law, therefore, the respondent no. 1 sanctioned credit facility to a natural person, albeit in the name of the sole proprietorship firm owned by such natural person.

In the commercial world, the word 'consumer' is understood to mean a person who buys any goods or services for consideration for consumption or use. For example, any industrial unit buying electricity for industrial production is understood to be a consumer of electricity. However, such an industrial undertaking cannot approach the Consumer Forum established under the provisions of the Consumer Protection Act, 1993 complaining of deficiency in services in view of the restrictive definition of 'consumer' in the Act of 1993. The Act of 1993 restricts the definitions of 'consumer' to persons who buys any good or service for personal use and leaves out purchases for commercial activity. Such restrictive definition has nexus to the objects sought to be achieved by the Act of 1993, that is, to provide a forum for expeditious disposal of disputes relating to deficiency in services or quality of goods consumed by a person for his/ her personal use.

Laxmi Engineering Works (supra) has considered the definition of 'consumer' as obtaining in the Consumer Protection Act, 1993. Consumer Protection Act, 1993 limits the category of consumers who can approach the Consumer Protection firm established under the provisions of the Consumer Protection Act, 1993 in lodging a complaint under the Act of 1993. It is in that context that, Laxmi Engineering Works (supra) has held that, a person who has purchased goods for commercial activity, cannot be held to be a consumer within the meaning of the Act of 1993. The ratio laid down in Laxmi Engineering Works (supra) cannot be held to mean that, any person buying goods or services for commercial use will not be treated as the consumer in any sphere. M/s. Sanjeev Kumar & Brothers (supra) and Dr. Hemant & Anr. (supra) have to be understood in such context.

Reserve Bank of India, when it is advising the banks, by its circular dated May 7, 2014, not to charge any foreclosure charges/prepayment penalties on all floating term loans sanctioned to individual borrowers, with immediate effect, it is not distinguishing between an individual borrower who has obtained the term loan for business exploitation or otherwise. Term loans are granted by banks, both for purchasing a home as also for commercial activities. There being no such distinction in the circular dated May 7, 2014, I am not minded to read the definition of 'consumer' as obtaining in the Consumer Protection Act, 1993 into such circular. They operate in different spheres.

In the facts of the present case, the petitioner having foreclosed the credit facilities enjoyed by the petitioner from the respondent no. 1 in October 2016, such foreclosure is governed by the circular dated May 7, 2014 issued by Reserve Bank of India. With effect from May 7, 2014 therefore, the respondent no. 1 is not entitled to charge any foreclosure charges/prepayment penalties on floating rate term loan sanctioned to individual borrower such as the petitioner. The foreclosure happening subsequent to the circular dated May 7, 2014, the demand of the respondent no. 1 for foreclosure charges/prepayment penalties, is contrary to such circular, and therefore is without any basis.

As noted above, by virtue of the interim order dated March 17, 2017, the respondent no. 1 deposited a sum of Rs. 13.35 lakhs with the respondent no. 1 as security for the prepayment charges and for issuance of the 'no due' certificate. The interim order dated March 17, 2017 put the respondent no. 1 upon notice that, should the decision of the respondent no. 1 to charge prepayment penalties found incorrect upon final hearing of the writ petition, interest as charged in respect of the credit card defaults, would be directed to be paid in respect of the deposit made in terms of such order until the refund thereof. Attention of the Court has not been drawn to any order of the Court modifying such order.

In such circumstances, the respondent no. 1 having been found not to be entitled to the prepayment charges and having received the sum of Rs. 13.35 lakhs in terms of the interim order dated March 17, 2017, the respondent no. 1 will proceed to refund the sum of Rs. 13.35 lakhs received from the petitioner, along with interest, calculated at the rate at which interest is calculated for credit card defaults, commencing from the date of receipt of the sum of Rs. 13.35 lakhs from the petitioner, till the date of refund thereof to the petitioner.

Since the direction is for refund of money, the petitioner, amongst other reliefs, is at liberty to execute this order as a decree of the Court.

W.P. No. 5521 (W) of 2017 is disposed of accordingly. No order as to costs.

Urgent certified website copies of this order, if applied for, be made available to the parties upon compliance of the requisite formalities.

[DEBANGSU BASAK, J.]

Raj Kumar Makkad (Expert) 21 January 2020
The aforesaid is the latest judgment of Calcutta High Court which not only deals with the issue in controversy in detail but also touches the RBI Circular 07 May 2014 which clearly prohibits all banks to charge foreclosure charges on closure of loan account.

T. Kalaiselvan, Advocate (Expert) 29 January 2020
.it is advised that banks will not be permitted to charge foreclosure charges or pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect," RBI said in a notification. ... Some banks are charging pre-payment penalty of up to 2 per cent of the outstanding loans.
RBI had barred banks from levying foreclosure charges or pre-payment penalties on home loans on floating interest rate basis.

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