1. Appellant herein filed O.S. No. 57 of 1996, on the file of Civil Judge (Sr. Dn.), Saundatti (old No. OS 60 of 1993, on the file of Principal Civil Judge, Bailhongal) against the first respondent firm and its four partners (respondents 2 to 5) and two sureties (respondents 6 and 7). The appellant and first respondent will also be referred to as the 'Bank' and 'borrower firm'. Respondents 1 to 5 together will also be referred to as the 'Borrowers' and respondents 6 and 7 as the 'guarantors'.

2. The plaint averments, in brief, were as under:
2.1 Appellant Bank sanctioned a term loan of Rs. 6,37,000/- to the first respondent firm (and its partners-respondents 2 to 5) for construction of ginning factory and purchase of machineries. Out of sanctioned loan, the borrowers availed in all Rs. 6,11,000/- (that is Rs. 1,00,000/- on 31-10-1984, Rs. 1,00,000/- on 13-11-1984, Rs. 2,04,743/- on 23-11-1984, Rs. 40,600/- on 18-12-1984, Rs. 50,000/- on 28-12-1984, Rs. 25,000/- on 11-6-1985 and Rs. 90,657/- on 19-9-1985). The borrowers and the sureties executed a Term loan-cum-hypothecation agreement dated 31-10-1984 in favour of the Bank agreeing to repay the loan in agreed instalments with interest at the rate of 2.5% above the RBI rate of interest subject to a minimum of 12.5% p.a., on 31st March, 30th June, 30th September and 31st December of every year so long as the principal or any part thereof remained unpaid. Under the said agreement they agreed that in default of payment of any instalments or interest, the entire loan amount shall become due without reference to further instalments; that they will pay the overdue interest at the rate stipulated by the Bank, if they failed to pay the loan amount or the interest on the due dates; and that they would pay interest at the rates varied from time to time in accordance with RBI directions until the dues were fully cleared. Under the said agreement, they hypothecated four items of machinery (described in plaint 'B' schedule) as security for repayment of the loan. They executed a letter dated 31-10-1984 undertaking to pay overdue interest at the rate of two per cent in the event of default and waiving notice of variation in the interest rates as per RBI directions.
2.2 The Bank alleged that the borrowers and sureties agreed that the Bank is at liberty to 'compound quarterly interest'. They further alleged that the respondents 3 and 4 mortgaged their land bearing Sy. No. 37, measuring 2 acre 1 gunta, situated at Saundatti (plaint 'A' schedule property) as security for payment of the loan, by way of mortgage by title deeds on 29-11-1984, confirmed by a subsequent letter dated 29-10-1984.
2.3The particulars of the amounts advanced, particulars of debits on account of interest, CGC fees, insurance premia and other miscellaneous debits and all payments made by the borrowers were shown in Loan Account No. OSL/SSI/47/1984, maintained regularly in the course of Bank's business. An extract of the said loan account duly certified under the Bankers Book Evidence Act was produced as an annexure to the plaint. As per the said account, a sum of Rs. 7,32,089/- was due from the respondents as on 22-9-1993 (date of suit).
2.4The Bank therefore prayed for a decree for the said sum of Rs. 7,32,089/- with interest at the rate of 21.5% p.a. compounded with quarterly rests from the date of suit till realisation. The plaintiff also sought a preliminary decree for the sale of mortgaged and hypothecated properties described in the schedules to the plaint with consequential reliefs.

3. Respondents 1 to 5 filed a written statement and respondents 6 and 7 filed a separate written statement, raising the following among other contentions :
(i) There was no agreement to pay compound interest and therefore the bank could not charge compound interest.
(ii) Whenever there were revisions in the RBI rate of interest, the Bank neither informed the borrowers about such revision in the RBI rate nor obtained their consent for the revision