JUDGMENT

R.F. NARIMAN, J.

1. A writ petition, by way of a Public Interest Litigation, filed under Article 32 of the Constitution of India, assails the constitutional validity of Section 21A of the Banking Regulation Act, 1949. The aforesaid section was introduced into the Banking Regulation Act by the Banking Laws (Amendment) Act of 1983 with effect from 15.2.1984. Section 21A of the Banking Regulation Act reads as under:

“21A. Rates of interest charged by banking companies not to be subject to scrutiny by courts

Notwithstanding anything contained in the Usurious Loans Act, 1918 (10 of 1918), or any other law relating to indebtedness in force in any State, a transaction between a banking company and its debtor shall not be re- opened by any court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.”

2. It will be seen that Section 21A interdicts the reopening by courts of a debt between a banking company and its debtor, on the ground that the rate of interest charged by the banking company, in respect of a loan transaction, is excessive. The section seeks to keep out of harm’s way the Usurious Loans Act, 1918 and/or any other State legislation relating to indebtedness, and then declares that no such loan transaction shall be reopened by any court on the ground of charging of excessive rates of interest. The writ petition has been filed by certain public spirited citizens, who rely on the report of the Parliamentary Standing Committee on Agriculture for the year 2006-2007 to say that Section 21A should be abolished, insofar as it applies to rural indebtedness. The Standing Committee’s Report reads as follows:

“The Committee feels that the worst exploitation of farmers is through the adverse credit policies of the financial institutions which compel farmers to starve under the burden of loans and commit suicides. The Committee finds that in 1918, the British passed the Usurious Loans Act which provided that no farmer could be charged a rate of interest higher than the authorised rate- which at that time was 5.5 per cent, and if charged, the case could be re-opened in court and the entire account re-settled. Moreover, the total amount of interest could not be higher than the original capital. But in 1949, the Banking Regulation Act was passed which made a special provision under Section 21 (A) saying that these will not apply to banking companies including cooperative banks.

In view of the plight of farmers due to heavy burden of credits, the Committee recommend that section 21 (A) of the Banking Regulation Act should be scrapped. All out concerted efforts should be made to bring down the rate of interest on Farm Credit to the level of 5.5% simple interest, as it used to be in the early 20^th century. In case of cooperatives, transaction cost/margin at each layer must be reduced as the length of chain, from RBI to NABARD to State-District and Cooperative Societies at village level and Regional Rural Banks, is very big. Eventually, the farmer has to take the burden of all these middlemen/lending agencies. The Committee, therefore, recommends to shorten this chain, so that the eventual creditor is directly linked to the borrower. The Committee further desire the Government to ensure that in no case, the interest should be higher than the original capital and charging of compound rate of interest should be absolutely prohibited so that exploitation of farmers by financial institutions is minimized.

REPLY OF THE GOVERNMENT

1.23 The Government in their action taken reply have stated that in order to bring down rate of interest on farm loans it has been announced in the Union Budget for the year 2006-07 that effective from Kharif 2006-07, farmers would receive crop loans upto a principal amount of Rs. 3 lakh at 7% rate of interest and the Government of India would provide necessary interest subvention for this purpose. Crop loans to farmers are generally made available through Kisan