IMPORTANT POINTS
(i) The expression term loan has no relevance with purpose for which loan is granted and therefore it cannot be said that loan granted for commercial purpose alone can be termed as term loan. Loan granted for renovation/construction by tenant bank to landlord can also be termed as term loan.
(ii) Ombudsman is obliged to comply with directions/circulars and notifications issued by RBI under Section 21 or 35 and he cannot ignore circulars and directions while dealing with complaint.

Headnote:(i) Banking Law-Ombudsman -Banking Regulation Act, 1949-Sections 21, 35 and 35A-Ombudsman is obliged to comply with directions/circulars and notifications issued by RBI under Section 35 or 21-He cannot ignore circulars and directions while dealing with complaints. (Para 15)
       (ii) Banking Law-Term loan-Charge of interest with quarterly rest-Loan granted by tenant bank to landlord for construction/renovation-Contract for charge of interest above RBI rate with quarterly rest-Interest debited as per contract - Complaint to Ombudsman assailing charge of interest with quarterly rest-Ombudsman s view that loan granted to landlord by tenant bank cannot be termed as term loan and only commercial loan can be termed as term loan-Consequent direction to recast interest at simple interest-Not correct-Various directions, circulars and notifications issued by RBI under Section 21 or 35 of Banking Regulation Act-RBI Notification treats loan to landlord as term loan-Notifications/circulars statutory in nature-Required to be complied by bank and Ombudsman- Expression term loan has no relevance with purpose for which it is granted - Ombudsman s award not sustainable-Award set aside-Remanded for fresh disposal.
       Held : That the circulars issued by the Reserve Bank of India under Section 21 or 35 of the Banking Regulation Act, 1949 are statutory in nature and are required to be complied with by the banks is not in any doubt. An Ombudsman appointed under the Scheme is obliged to regulate the working of the banks and issue directions to them to carry out the directions and circulars issued by the Reserve Bank of India under Section 21 or 35 of the Act. The view taken by the learned Ombudsman to the effect that the loans granted by the banks to their landlords for construction/renovation of premises which are taken on lease or rent by the banks cannot be termed as "term loans", as in the words of the learned Ombudsman "only those loans which are taken for commercial purposes can be construed to be term loans", is clearly erroneous and does not appeal to us. (Para 11)
       The expression "term loan" is well understood in banking parlance. The expression implies the grant of loan for a fixed term. It has no relevance with the purpose for which loan is granted. Where the term for repayment is long, the loan is called "long term loan" and where the term exceeds one year but not five to seven years, it is commonly known as "medium term loan". (Para 12)
       The opinion of the learned Ombudsman to the effect that circulars of the Reserve Bank of India which permitted charge of interest at quarterly rests applies only to "term loans" for "commercial purposes" and not to the loans given to the landlords for construction/renovation of the premises, does not bear scrutiny. The view expressed by the learned Ombudsman was apparently influenced by the judgment of this Court in Harbans Singh s case (supra), which had negatived the plea raised on behalf of the appellant bank in that case that the word term loan would include not only the loan advanced for commercial purposes but also such loans as one advanced to the landlords for construction/renovation of the buildings given on lease to the lending bank for their commercial purposes. A careful persual of the judgment in Harbans Singh s case (supra), however, shows that the Bench was handicapped because various circulars/notifications/directions issued by the Reserve Bank of India under Sections 21 and 35 of the Act dealing with the subject were not brought to the notice of the Bench. (Para 13)
       Held further : There have been more than a dozen circulars/notifications/directions issued by the Reserve Bank of India, which deal with the subject of rate of interest to be charged from the landlords loanees and the manner of its calculation. A critical examination and application of those circulars was necessary to decide the complaint filed by the respondents against the appellant bank, which unfortunately the learned Ombudsman did not do. Since, an Ombudsman is appointed by virtue of the Scheme framed under Section 35 A of the Banking Regulation Act, 1949, he is obliged to comply with the directions/ circulars and notifications issued by the Reserve Bank of India under Section 35 or 21 of the Act. He is also required to issue directions to Banks, based on those directions/circulars and ensure their compliance. The learned Ombudsman could not have ignored the circulars and directions while dealing with the complaint filed by the respondent. The impugned award having been made ignoring various circulars/directions issued by the Reserve Bank of India, the same cannot be sustained. It is therefore, appropriate that we set aside the impugned award dated 26.2.1997 and remit the complaint to the learned Ombudsman (Hyderabad) for its fresh disposal in the light of the circulars/directions issued by the Reserve Bank of India with regard to charging of rate of interest from the landlord loanees, whose buildings are taken on lease/rent by the concerned bank and calculating the interest at quarterly rests. Accordingly, this appeal succeeds and is allowed. The complaint is remanded to the learned Banking Ombudsman, Hyderabad, for its fresh disposal in the light of the observations made hereinabove. (Para 15)

JUDGMENT

Dr. Anand, J.-Leave granted.

This appeal is directed against an award made by the Banking Ombudsman, Hyderabad, (appointed under the Banking Ombudsman Scheme, 1995) dated 26.2.1997, in a complaint filed by the respondents against the appellant bank. The appeal arises in the following circumstances :

2. On 12.1.1980, the appellant bank sanctioned a loan of Rs. 80000/- in favour of respondent No. 3 for construction of a strong room. A further loan of Rs. 25000/- was granted to respondent No. 3 on 21.2.1986 to meet part of the construction cost of the premises which were to be taken on lease by the appellant. On 22.2.1991, an additional loan of Rs. 200000/- was granted by the appellant bank to respondent No. 3 to construct a bigger strong room. The entire premises, after the construction/renovation, were taken on lease by the appellant bank. In respect of the loan granted on 12.1.1980, respondent No. 3 executed a Demand Promissory Note undertaking to pay interest at the rate of 5% above the Reserve Bank of India rate of interest with minimum rate of interest @ 14% per annum compounded quarterly. So far as the loan granted on 21.2.1986 is concerned, respondent No. 3 executed a Demand Promissory Note, undertaking to pay interest at the rate of 7.5% above the Reserve Bank of India rate of interest with minimum rate of interest @ 17.5% per annum compounded quarterly. A similar Demand Promissory Note was also executed by respondent No. 3 in respect of the loan dated 22.2.1991 undertaking to pay interest at the rate of 7.5% above the Reserve Bank of India rate of interest with minimum rate of interest @ 17.5% per annum compounded quarterly. The two loans granted in the year 1980 and 1986 were, after repayment, closed in 1988 and 1989 respectively. Interest in respect of those loans had been debited at the contractual rate with quarterly rests. The appellant bank also debited interest with quarterly rests in respect of the loan of Rs. Two Lacs and irrespective of the higher contractual rate of interest, the bank debited interest only at the rate of 15% per annum in view of its Head Office Circular No. 379/90 and No. 90/91.

3. Respondent Nos. 2 to 5 filed a complaint before the Banking Ombudsman in August, 1996 assailing the action of the appellant bank in charging interest at the contractual rate with quarterly rests in respect of the loans granted in the year 1980 and 1986 and also for debiting interest with quarterly rests in respect of the loan granted in 1991. The respondents requested the Banking Ombudsman for a direction to the appellant bank to recast the interest debited in all the loan accounts by debiting interest at simple rate and to adjust the excess amount charged by way of higher interest to the loan account granted in 1991 and to pay the balance amount, if any, to the respondents. The complaint was entertained by the learned Ombudsman and notice was issued to the appellant who resisted the application on various grounds. The appellant justified its action on the basis of various circulars issued by the Reserve Bank of India from time to time including the circulars dated 1.4.1981, 7.3.1986 and 17.5.1994.

4. Relying upon the judgment of this Court in State Bank of Patiala v. Harbans Singh1, the learned Ombudsman allowed the complaint of respondent Nos. 2 to 5 and directed the appellant bank to recast the two loan accounts of the year 1980 and 1986 which stood closed in 1988 and 1989 respectively. The learned Ombudsman, after referring to the circular dated April 18, 1991 (Circular seems to be of April 1, 1991) and certain other circulars opined that the loans granted by banks to their landlords for construction/renovation of premises which the banks take on lease or rent lateron, cannot be termed as "term loans". The learned Ombudsman also opined, on the basis of the judgment in Harbans Singh s case (supra), that interest could not be charged by the banks in respect of such loans at quarterly rests and that the appell

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1998 Supreme(SC) 859

Cases Referred (1)