The court established that the term 'with quarterly rests' in the loan agreement did not imply the charging of compound interest and that the bank was not entitled to charge an enhanced rate of interest without notifying the borrower.

( 1 ) THIS appeal by the plaintiff/bank is directed against the judgment and decree dated 16-6-1979 passed by the ii Addl. Civil Judge, Belgaum, in O. S. No. 101 of 1977, on his file, disallowing compound interest and interest at enhanced rate from a certain period.

( 2 ) THE defendant obtained a loan of rs. 36,750 from the plaintiff /bank on 16-10-1971. He executed a promissory note as per Ext-P-1 as also a hypo thecation deed as per Ex P-5. He also deposited title deeds of immovable properties creating mortgage. Both in the promissory note Ex P-1 as also in the hypothecation deed, he agreed to pay the said sum on demand with interest at 4 1/2% per annum over the reserve Bank Rate, minimum 9 1/2% per annum with quarterly rests. The original minimum rate fixed was 10 1/2% per annum. According to the Bank- it was subsequently increased from 1-8-1974 to 14 3/4% per annum and from 25-6-1975 it was raised to 15 1/2% per annum by the appellant in terms of the agreement between the parties.

( 3 ) THE plaintiff IBank instituted the suit at O. S. No. 101 of 1977 for recovery of the amount outstanding viz. , Rs. 65,997-17 p. with interest at 15 1/2% per annum from the date of the suit till the date of realisation and for costs etc. by sale of the mortgaged properties and the hypothecated tractor.

( 4 ) THE suit was decreed by the Court below for Rs. 52,989-61 p. , with future interest @ 10 1/2% per annum on Rs. 36,750 from the date of the suit till the date of realisation Feeling aggrieved by the disallowance of part of interest claimed and the rejection of claim for compound interest, the plaintiff /bank has come up in appeal before this Court.

( 5 ) THE learned Advocate Shri S. G. Sundaraswamy appearing for the appellant vehemently contended that the Court below erred in disallowing a sum of Rs. 13,007-56 p. from the suit claim. He further submitted that the court below was not justified in restricting the interest to 104% Per annum, even with regard to future interest. The future interest should have been awarded @ 15 1/2% per annum from the date of the suit till the date of realisation. He further submitted that the Court below should have seen that the respondent agreed to pay interest @ 5 1/4% perannum over the Reserve Bank Rate, minimum 14 1/2% per annum from 1-8-74 as per Ex- P-32. According to him, the words 'with quarterly rests for value received' in the promissory note ex. P-1 as well in the hypothecation deed Ex P-5, clearly indicated that the defendant/respondent agreed to pay compound interest as per the. usual custom of Banks and commercial institutions. Hence, he submitted that the appeal was entitled to succeed.

( 6 ) AS against that, the learned advocate Shri V. T. Raya Reddy appearing for the respondent vehemently contended that there was no custom nor understanding to pay compound interest at the time of taking the loan. He further submitted that the conditions stipulated in Ex. P-5 for enhancing the rate of interest were not satisfied by the Bank and, hence, the Bank could not ask for enhanced rate of interest. He also submitted that the so called agreement ex p-32 was taken as a blank form on which the respondent was made to put his signature even at the time of issuing the loan and that subsequently it was filled up without the consent and knowledge of the defendant/respondent and so it was not binding on him. He also pointed out that Ex P-32, the latter part, purported to create novatio in the contract which was never the intention of the parties and hence, he submitted that the appeal was liable to be dismissed.

( 7 ) THE points, therefore, that arise for our consideration in this appeal are: (1) Whether the parties understood that compound interest was stipulated by the term 'with quarterly rests' at the time of the execution of Ex P-1, the promissory note and Ex P-5, the hypothecation deed? and, if not, whether the defendant is liable to pay compound interest as claimed? (2) Whether the Bank has satisfied th

Click Here to Read the rest of this document