The main legal point established in the judgment is that banks are entitled to interest at contract rates, subject to the ceiling or limitations placed by the Reserve Bank of India, and that courts should correct decrees that exceed the suit claim.

( 1 ) THIS appeal is by the plaintiff in O. S. No. 3518/1982 on the file of the City Civil Court, Bangalore. The plaintiff-Bank filed the suit on 2-12-1982 against the borrower (first defendant) and the guarantor (second defendant) for recovery of Rs. 3,20,095-95 P. with interest at 16. 25% per annum from the date of suit till the date of realisation with costs and for a direction for sale of the suit schedule moveable properties for realisation of the decretal amount and for a further direction that the balance if any to be recovered from the defendants personally. For convenience, the parties will be referred to by their ranks in the trial Court.

( 2 ) THE plaint averments, briefly are: On the request of the defendants, the Bank agreed to give a term loan of Rs. 3,00,000/- against the hypothecation of moveables mentioned in the plaint schedule to the first defendant; The first defendant entered into an agreement with the plaintiff on 5-7-1978 containing the terms of the said loan and in pursuance of it, as and when required, by the first defendant, the plaintiff made advance to the first defendant. The principal amount had to be repaid on or before 1983 in quarterly instalments of Rs. 15,000/ -. The first defendant agreed to pay interest on the amount borrowed at 5% over the Reserve Bank of India rate with a minimum of 14% per annum with quarterly rests, by letter dated 5-7-1978. He agreed to pay additional interest of 3% per annum in the event of his failure to pay the instalments in time on the amount so defaulted. By another letter dated 5-6-1978, the first defendant also agreed to pay increase in the rate of interest as per the Directives of the Reserve Bank of India given to the Bank from time to time. The first defendant also executed an on-demand promissory note dated 5-7-1978 promising to pay to the Bank on demand, a sum of Rs. 3,00,000/- with interest at 3% per annum over the Reserve Bank of India rate with a minimum of 14% per annum with quarterly rests. To secure payment of the amounts, the first defendant executed an agreement dated 5-7-1978 hypothecating the moveable properties described in the plaint schedule in favour of the Bank. The second defendant guaranteed repayment of the amounts advanced to first defendant with interest and other charges by executing a letter of guarantee dated 5-7-1978 his liability being limited to Rs. 3,00,000/- and interest accrued thereon. The amounts advanced to the first defendant from time to time and the payments made by the first defendant to the Bank and the other amounts due by the first defendant to the Bank by way of interest and other charges were entered in the Account Books of the Bank and the true extract of the account was produced along with the plaint. As per the said account, a sum of Rs. 3,20,095-95 P was due as on 23-11-1982. The first defendant gave letters of acknowledgment of debt dated 16-7-1980 and 20-1-1982 acknowledging his liability. As the first defendant failed to pay the amount due in spite of plaintiff 's notice dated 6-3-1981, and as the second defendant refused to receive notice, the Bank filed the suit against the defendants for the recovery of Rupees 3,20,095-95 P with interest at 16. 25% per annum from the date of suit to date of realisation.

( 3 ) DEFENDANTS 1 and 2 in their written statement admitted the grant of loan facility of Rs. 3,00,000/- and execution of the loan documents; they however, inter alia contended that only simple interest could be charged and recovered only at a rate of 14% per annum and not compound interest at 16. 25% with quarterly rests; that the plaintiff was not entitled to charge any additional interest and defendants were entitled to relief under the provisions of the Karnataka Usurious Loans Act in regard to the excess interest claimed; that plaintiff-Bank claimed interest and made debits, contrary to the directives of Reserve Bank of India; They challenged the debit entries in the statement of accoun