Judgment:
Rama Rao, J.
1. A. S. No. 532 of 1978 : The plaintiff is the appellant. The plaintiff filed a suit for recovery of Rs. 1,60,425.04 together with interest personally against defendants Nos. 1, 2, 4 to 8, 10 to 13 and against the assets of defendants Nos. 3 and 9 in the hands of defendant Nos. 14 to 22 and in default of payment for sale of the suit property for realisation of the decree debt. The suit is filed on the basis of a promissory note executed for a sum of Rs. 1,30,000 and agreeing to repay the loan with interest at 5% over the Reserve Bank rate with a minimum of 11% per annum subject to periodical enhancement. The plea of the defendants is that the rate of interest is abnormal and excessive. Apart from other pleas, it is stated that the amount has to be scaled down fixing a reasonable rate of interest. The learned judge found that for the principal amount of Rs. 1,30,000, Rs. 52,280.04 is claimed. The learned judge held that this is unurious, penal and unconscionable. In the result, the suit is decreed for the principal amount and the interest thereon at the rate of 12% per annum.
A. S. No. 696 of 1979 :
2. This appeal arises out of a suit filed for recovery of Rs. 2,87,681.85 with interest and in default of payment for the sale of the suit schedule properties to realise the suit debt. The first defendant borrowed from the plaintiff-bank a sum of Rs. 1,85,000 repayable with interest at 6 1/2% over the Reserve Bank rate with minimum of 12 1/2% per annum subject to periodical enhancement. The plea in the written statement is that the interest is abnormal and excessive. One of the issues, viz., issue No. 3, is whether the interest claimed is penal. Issue No. 5 is whether the defendant is entitled to the benefits under the provisions of the Andhra Pradesh Agricultural Indebtedness Relief Act. It was held that the defendant is not entitled to the benefits of Act IV of 1938. In so far as issue No. 3 is concerned, it was held that for the principal amount of Rs. 1,85,000 the interest has come to Rs. 1,02,681.85 for a period of two years, 11 months and 8 days and it was held by the learned judge that it is usurious and hampers trade and commerce and interest at the rate of 12% per annum simple will meet the ends of justice.
3. Learned counsel for the appellant in both the appeals contended that the levy of interest by Andhra Bank is linked with and based upon the rate of interest fixed by the Reserved Bank and the question of charging penal or unconscionable interest does not arise and in any event such contention does not survive in view of section 21A of the Banking Regulation Act. Learned counsel for the respondents seeking to sustain the judgments of the courts below contended that the levy of such exorbitant interest by a nationalised bank is unconscionable and section 21A of the Banking Regulation Act is unconstitutional as it is beyond the legislative competence of Parliament and is in breach of article 14 of the Constitution.
4. At the outset, it is necessary to clear one factual aspect. The claim of benefit under the provisions of the A. P. Andhra Pradesh Agricultural Indebtedness Relief Act is negatived in one of the suits and in the other suit no claim is made.
5. To appreciate the rival contentions, it is necessary to have a grip over the relevant provisions of the Banking Regulation Act, 1949. Section 5(b) connotes 'banking' as follows :
''banking' means the accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.'
Section 21 relating to the control of Reserve Bank to the extent relevant is as follows :
'21. (1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interest of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined.
(2) Without prejudice to the generality of the power vested in the Reserve Bank under sub-section (1), the Reserve Bank may give directions to banking companies...in particular as to -
(e) the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.
(3) Every banking company shall be bound to comply with any directions given to it under this section'.
Section 21A reads as follows :
'21A. Notwithstanding anything contained in the Usurious Loans Act, 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 reopened by any court on the ground that the rate of interest charged by the company in respect of such transaction is excessive'.
Section 22 reads as follows :
'22. Save as hereinafter provided, no company shall carry on banking business in India unless it holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued subject to such conditions as the Reserve Bank may think fit to impose'.
6. The Statements of Objects and Reasons for the Banking Regulation Act, 1949, setting out the necessity of measures for controlling the banking operations and highlighting the interest of depositors is as follows :
' The provisions of law relating to banking companies at present form a subsidiary portion of the general law applicable to companies and are contained in Part XA of the Indian Companies Act, 1913. These provisions, which were first introduced in 1936 and which have undergone two subsequent modifications have proved inadequate and difficult to administer. Moreover, while the primary objective of company law is to safeguard the interest of the stock-holder, that of banking legislation should be the protection of the interest of the depositor. It has, therefore, been felt for some time that separate legislation was necessary for the regulation of banking in India. This need has become the more insistent on account of the considerable development that has taken place in recent years in banking, especially the rapid growth of banking resources and of the number of banks and branches. Regard must also be had to the fact that the banking system is likely in the post-war period to be more vulnerable by reason of the great expansion, both quantitatively and relatively, that has taken place in demand deposits, as compared with time deposits, during the war years. The enactment of a separate comprehensive measure has in consequence now become imperative'.
7. The Banking Regulation Act is obviously intended to have self- contained provisions to regulate and control the banking operations and, therefore, the provisions relating to banking have been deleted from the Companies Act and have been compressed into an independent Act with separate entity. The definition of banking in section 5(b) is of wide amplitude and it is patent from the definition and Statement of Objects and Reasons that the primary and predominant purpose of the bank is to accept deposits and safeguard the interest of deposit holders. The banking operations are regulated and hedged in by diverse provisions and the Reserve Bank plays a pivotal role and virtually controls the entirety of the operations including the stipulation of interest. Apart from the provisions of the Act in quotes above, there are other provisions in the Act which seek to invest the Reserve Bank with wide power of switching. Section 35A obligates the banking companies to comply with the directions issued by the Reserve Bank concerning matters conducive to the interests of the depositors or the interest of the banking company. Section 36AA confers powers upon the Reserve Bank to remove managerial and other employees in the banking company. Sections 37 and 38 enable the Reserve Bank to make an application to the High Court for the winding up of the banking company. The interests of depositors permeate through the provisions of the Banking Regulation Act pertaining to constitution, administration, governance and banking business.
Section 21A of the Banking Regulation Act interdicts the accessability to courts impugning the transaction between the bank and the debtor on the ground that the interest is excessive. This provision is inserted by section 24 of the Banking Laws (Amendment) Act, 1983 (Act I of 1984), obviously to get over the plea of the usurious sting in the rate of interest charged by the bank. Before getting into the thick of the rival contentions regarding constitutional validity of section 21A, it is profitable to advert to the decisions of this court regarding the immunity of the agriculturist from levy of excessive rate of interest and adherence to the rate of interest visualised under Act IV of 1938 despite the apparent sweeping provision, section 21A. In Indian Bank v. M. Krishna Murthy, AIR 1983 AP 347, the Division Bench comprising P. A. Choudary and Kodandaramayya JJ., considering the impact of section 4(e) of Act IV of 1938 excepting the debts due from the applicability of the Act, held that this provision does not cover the debts due to the banks from agriculturists and the scaling down of the debt due to the banks from agriculturists under Act IV of 1938 is nott disturbed. The effect of this decision is that the last part of section 4(3) of Act IV of 1938 postulating 'any debt due to any Corporation formed in pursuance of an Act of Parliament of the United Kingdom or any special Indian Law or Royal Charter or Letters Patent' is struck down and the banks can recover interest from agriculturists only at the rates permitted under section 13 of Act IV of 1938. Subsequent to this decision, section 21A of the Banking Regulation Act was inserted by Act I of 1984 providing that the rate of interest charged by the bank is not liable to be reopened and the non obstance clause is inserted to take away the coverage of the Usurious Loans Act and any other law relating to indebtedness. In M. Satyanarayana v. Andhra Bank Ltd., : AIR1985AP77 , the question which cropped up is whether section 21A of the Banking Regulation Act has the effect of sterilising the provisions of Act IV of 1938 regarding the debts due to the bank by the agriculturists. In the context of considering this aspect the inter-play of section 21A21A and the Usurious Loans Act, as amended by the Madras Amendment Act of 1936, applicable to Andhra Pradesh and the Act of 1938 has been considered and it was held that the benefit conferred by the Usurious Loans Act, as amended by the Madras Amendment Act of 1936, is intended to confer a special benefit as a class legislation on agriculturists and the benefit conferred by the Act is not merely to prevent an excessive rate of interest but to wipe out the indebtedness of agriculturists as a class. Kodandaramayya J. held as follows (at page 80) :
'The last contention urged by the learned counsel for the bank is that the Banking Laws (Amendment) Act, 1983, in the light of the judgment of this court, wanted to take away the debts due to the bank from the purview of the State Act. We cannot readily assume such intention on the part of the Central legislation to impinge on the State Act which is a special law intended to benefit the agriculturists and which is a State subject. However, as a matter of construction, I am of the opinion that section 21A of the Act has not the effect of engrafting an exception to the debts due to the bank without the necessity of amending the State Act. It prohibits the reopening of the debts on the ground that it is excessive; whereas the State Act liquidates the debts on the ground that the debtors are agriculturists. The operation of both the Acts is quite distinct and different. Accordingly, I am of the opinion that debts due to banks are not excluded from the purview of the State Act as excepted debts by virtue of section 21A of the Act and agriculturists governed by Act IV of 1938 are entitled to the benefit of the said Act in respect of the debts due to the banks also'.
8. In A. S. No. 825 of 1977, the question whether the loan contracted from the bank carrying interest at 12 1/2% per annum and 21% per annum in case of default by itself could be deemed to be excessive and usurious so as to attract the provisions of the Usurious Loans Act (Act 10 of 1918) is referred to. While considering the impact of the Madras Amendment to the Usurious Loans Act in so far as the presumption that the interest is excessive in the case of agriculturists and the impact of section 21A of the Banking Regulation Act in so far as loans taken by persons other than agriculturists, the Division Bench consisting of Jeevan Reddy and Kodandaramayya JJ. held as follows :
'It is clear that the said provision makes the provisions of the Usurious Loans Act inapplicable to any transaction between a banking company and its debtor. The courts' power to reopen the transaction under the provisions of the Usurious Loans Act on the ground that the rate of interest charged is excessive is no longer available. It is not disputed that it affects the pending proceedings also though the Act came into force on February 15, 1985. Thus, it is clear that the Usurious Loans Act is no longer applicable to any debt due to a banking company'.
9. It is also made clear in the said decision that section 21A does not hinge upon the debts contracted by the agriculturists and the view taken in M. Satyanarayana v. Andhra Bank Ltd., : AIR1985AP77 , is approved. Despite the said decision, learned counsel for the respondents contends that is apparent that the constitutional validity of section 21A is not questioned and the Division Bench was not invited to consider the issue regarding the constitutional validity of section 21A and the two-fold ground on which the constitutional validity is questioned is that it is not competent for Parliament to enact any legislation and it is also violative of article 14 of the Constitution. The sheet-anchor for this contention is the decision of this court in State Bank of India, In re [1988] 63 Comp Cas 210 (AP).
10. In so far as legislative competence is concerned, the relevant entry is entry No. 45 in List I of the Seventh Schedule which pertains to banking. The crucial issue is whether giving credit and stipulation of interest are integral parts of banking activity. In Attorney-General for Alberta v. Attorney-General for Canada [1947] AC 503 (PC) by Parts I and II of the Alberta Bill of Rights Act, 1946, a provision was made for generally regulating the creation, expansion and dealing with credit of the banks and in the context of considering whether this provision is within the business covered by the word 'banking', Viscount Simon J. delivering the judgment held as follows (at page 517) :
'The concept of banking certainly includes the granting of credit by banks; 'a banker', as Duff C. J. said in dealing with the Alberta Legislation Reference (I) 'has been defined as 'a dealer in credit''. Whether the expansion of credit now effected by bankers' advances is regarded as wise or unwise, as just or unjust, as economically desirable or economically unjustifiable, does not, in the view of their Lordships, affect the point here at issue at all. If it is fairly included within the conception of 'banking', it is a matter exclusively reserved for the Legislature of Canada'.
11. In State Savings Banks of Victoria Comrs. v. Permewan Wright & Co. Ltd. [1915] 19 CLR 457 it is held as follows :
'The essential characteristics of the business of banking may be described as the collection of money by receiving deposits on loan, repayable as and when expressly or impliedly agreed upon, and the utilisation of the money so collected by lending it against in such sums as are required'.
12. In Rustom Cavasjee Cooper v. Union of India [1970] 40 Comp Cas 325 (SC) (bank nationalisation case), the constitutional validity of the Banking Companies (Acquisition and Transfer of Undertakings) Act was questioned. Regarding the connotation of the expression 'banking' it was held as follows (page 351) :
'The expression 'banking' is not defied in any Indian Statute except the Banking Regulation Act, 1949. It may be recalled that by section 5(b) of that Act 'banking' means 'the accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise, and withdrawable by cheque, draft or otherwise'. The definition did not include other commercial activities which a banking institution may engage in'.
13. It was also held as follows (page 352) :
'In modern times in India as elsewhere, to attract business, banking establishment render, and compete in rendering, a variety of miscellaneous services for their constituents. If the test for determining what 'banking' means in the constitutional entry is any commercial activity which bankers at a given time engage in, great obscurity will be introduced in the content of that expression. The coverage of constitutional entry in a federal constitution which carves out a field of legislation must depend upon a more satisfactory basis'.
14. It is further held as follows (p. 352) :
'The legislative entry in List I of the Seventh Schedule is 'banking' and not 'banker' or 'banks'. To include within the connotation of the expression 'banking' in entry 45 of List I, power to legislate in respect of all commercial activities which a banker by the custom of bankers or authority of law engages in, would result in rewriting the Constitution. Investment of power to legislate on a designated topic covers all matters incidental to the topic. A legislative entry being expressed in a broad designation indicating the contour of plenary power must receive a meaning conducive to the widest amplitude, subject, however, to limitations inherent in the federal scheme which distributes legislative power between the Union and the constituent units. But the field of 'banking' cannot be extended to include trading activities which, not being incidental to banking, encroach upon the substance of the entry 'trade and commerce' in List II'.
'Banking' as known in general and legal parlance primarily envisages the acceptance of deposits and payment of interest thereon and lending such amounts received as deposits to the constituents on payment of interest. The bank strives to strike a balance between the money payable to the depositors on demand and recovery of loans from the debtors to meet the demands of depositors and the element of interest is present both ways and in this process of balancing, default interest is charged by the banks with an obvious purpose to pinch or alert the debtors to repay the debt within stipulated time expeditiously thereafter. The old concept of sin attached to charging of interest is buried countless fathoms deep and the attempt to revive or conjure up the same will be far removed from the present trend of economy. The credit economy is running through and without credit the businessman and the country will be gasping. Credit injects vigour into business or industry in infancy and after crossing the teething trouble, the industry will be in a position to repay the debts with interest with ease and comfort. The interest, reduced to reality and short of all prejudices, is a return for parting with the money temporarily on the part of the lender and the payment of additional amount by the debtor for accommodating him with the money. It is true that charging of onerous interest exploiting the need and disadvantageous position of the debtor is frowned upon at all times and, to ameliorate their position, Acts have been passed. The charging of interest is interwined with banking business and the element of interest is ingrained in the veins of all dealings in society. The bank is a 'dealer in credit'. Section 21A strives to safeguard the levy of interest and quantum of interest charged and section 21A is essentially concerned with the banking operation and, therefore, within the legislative competence of Parliament.
15. The other contention pertains to breach of article 14 of the Constitution. The modalities and the quantum of interest is uniform in all the banks as regulated by the Reserve Bank. The charging of interest is tied up with the interest fixed by the Reserve Bank. The Reserve Bank is deposited with diverse powers for regulating the banking business in the country and the Reserve Bank, taking stock of the prevalent economic growth, cost of living index, purchasing and paying capacity and other factors arrives at the rate of interest chargeable by the banks. The banking companies are bound to adhere to the guidelines and directions issued by the Reserve Bank. The rate of interest chargeable by the banks is rooted in the rate of interest fixed by the Reserve Bank and as a sequel to the decision of the expert executive. Apparently with a view to have uniform rate of interest in all banking companies throughout the country at all times and situations, the jurisdiction of civil courts is taken away. The ouster of jurisdiction of civil courts has been a familiar phenomenon and the allergy for the same is withering away by efflux of time. In Vellukunnel V. Reserve Bank of India [1962] 32 Comp Cas 514 (SC), in the context of considering the content of sections 38(1) and (3)(b)(iii) of the Banking Companies Act, 1949, being violative of articles 14, 19 and 301 of the Constitution and excluding the judicial process from adjudicating a winding up petition and making the Reserve Bank's opinion predominant, the Supreme Court held as follows (page 531) :
'This brief survey of some of the other provisions of the Banking Companies Act, in addition to the general provisions earlier noticed, makes it plain that the Legislature considers hat consistent with its position as a Central Bank and more so with its duties and obligations, the Reserve Bank must have a decisive voice in certain matters. It is in this context and setting that the provisions of section 38(1) and (3)(b)(iii) of the Banking Companies Act must be viewed'.
16. It is also held as follows (p. 542) :
'These observations lay down clearly that there may be occasions and situations in which the Legislature may, with reason, think that the determination of an issue may be left to an expert executive like the Reserve Bank rather than to courts without incurring the penalty of having the law declared void. The law thus made is justified on the ground of expendiency arising from the respective opportunities for action. Of course, the exclusion of courts is not lightly to be inferred nor lightly to be conceded. The reasonableness of such a law in the total circumstances will, if challenged, have to be made out to the ultimate satisfaction of this court, and it is only when this court considers that it is reasonable in the individual circumstance that the law will be upheld'.
17. It is further held as follows (p. 542) :
'In the present case, in view of the history of the establishment of the Reserve Bank as a Central Bank for India, its position as a bankers' bank, its control over banking companies and banking in India, its position as the issuing bank, its power to license banking companies and cancel their licences and the numberous other powers, it is unanswerable that between the court and the Reserve Bank, the momentous decision to wind up a tottering or unsafe banking company in the interests of the depositors may reasonably be left to the Reserve Bank. No doubt, the court can also, given the time, perform this task. But the decision has to be taken without delay, and the Reserve Bank already knows intimately the affairs of banking companies and has had access to their books and accounts. If the court were called upon to take immediate action, it would almost always be guided by the opinion of the Reserve Bank. It would be impossible for the court to reach a conclusion unguided by the Reserve Bank if immediate action was demanded.'
18. It must be stated that there is no trace of usurious sting in the rate of interest charged by the bank and it cannot be gainsaid that it is less than the rate prevailing in the market particularly in the commercial parlance. The 'default interest' appears to have been put on a high side to coerce the debtors to repay the loans expeditiously. There is absolutely no arbitrariness and article 14 is not infringed.
19. In S.A.No. 972 of 1984 (State Bank of India, In re [1988] 63 Comp Cas 210 (AP), the debtor is admittedly an agriculturists. The interest charged by the State Bank of India was 1 1/2% over and above the prevailing bank rate but subject to a minimum of 8 1/2% p.a. with quarterly rests. P. A. Choudary J. held that the courts should not enforce compound interest and more than what is specified in section 13 of Actt IV of 1938 and even after the enactment of section 21A, the provisions of Act IV of 1938 have full sway. It is further held that the expression 'debtor' used in section 21A does not take in its sweep the agriculturists debtor. The learned judge having held that the decisions rendered in Indian Bank v. Krishna Murthy, AIR 1983 AP 347, and M. Satyanarayana v. Andhra Bank Ltd., : AIR1985AP77 , still hold the field in respect of debts due from agriculturists despite section 21A, went further and held that section 21A is beyond the legislative competence of Parliament and it is arbitrary and violative of article 14 of the Constitution. It is patent that the learned judge appears to have been mainly swayed by injustice in charging compound interest particularly on amounts advanced to agriculturists. The accent on agriculturists indebtedness and the protection to the agricultural debtors permeated the judgment and in the process of heavy slant towards this segment overlooked the crucial far-reaching effect of section 21A. The judgment is prefaced by the interpretation of the word 'debtor' as excluding an agriculturist and this appears to be far removed from the reach and purport of 'debtor' as the expression debtor is comprehensive enough to take in all kinds of debtors. However, this aspect is not decisive of the issues involved. The concept of banking as understood throughout the world primarily taken in the acceptance of deposits and payment of interest thereon and advances as loans and charging interest apart from other transactions and the element of interest is a necessary and inseparable part of banking and banking cannot survive without the breath of interest. The ouster of jurisdiction is visualised so as to have uniform adherence to the interest throughout the country and the stipulation of interest is not arbitrary and it is concretised by the rate fixed by the expert body ant the apex institution (the RBI). It is true, as contended by learned counsel for the appellants, that the case in S.A.No. 972 of 1984 (State Bank of India, In re, [1988] 63 Comp Cas 210 (AP)) is concerned solely with the debt due by agriculturists and this aspect is already covered by a prior decision and the consideration of legislative competence and repugnancy to article 14 are obiter. We do not propose to rest our decision on the aspect of obiter only as the learned judge considered the matter in depth. The Division Bench of this court in A. S. No. 1077 of 1977 held that section 21A does not apply to loans to agriculturists and the constitutional validity of section 21A was not considered. In view of the aforesaid discussion, we hold that section 21A of the Banking Regulation Act is legal and enforceable and does not apply to debts eligible to benefits under the A. P. Agriculturists Relief Act (Act IV of 1938). With respect, we are unable to subscribe to the view propounded by our learned brother, Choudary J.
20. In the result, the judgments and decrees of the courts below in restricting the interest to 12% p. a. only are set aside. Appeals allowed.