Banks charging on foreclosure of loan –How fair it is in the eyes of law

A matter had come up before Punjab State Consumer Dispute Redressal Commission against DCB Bank Ltd filed by one Ram Paul Bajaj on the issue of bank charging for foreclosure of bank loan. This is not the first time such issue coming  up before Consumer Commission where terms & conditions are not properly disclosed to the parties and later on penalize them for their hidden conditions . Hon’ble Supreme Court in the case of M/S Modern insulator Ltd v/s Oriental Insurance Co. Ltd in its judgment in 2000 had said categorically

“It is the fundamental principle of insurance law that utmost good faith must be observed by the contracting parties and good faith forbids either party from non-disclosure of the lads which the parties known. The insured has a duty to disclose and similarly it is the duty of the insurance company and its agents to disclose .ill material facts in their knowledge since obligation of good faith applies to both equally.

 As the above terms and conditions of the standard policy wherein the exclusion clause was included, were neither a part of the contract of insurance nor disclosed to the appellant respondent cannot claim the benefit of the said exclusion clause”

Similar is the situation with banks also. Banks allure customers by providing loan at lower interest rate and once loan is disbursed, borrower has no way out from clutches like pre-payment /foreclosure penalties for getting NOC 

 In the present matter complainant got a limit with the bank and was issued a bank loan account. Thereafter complainant deposited the entire outstanding loan of Rs. 85691/-along with GST @18% Rs. 15422/- totaling Rs. 101115/- .Complainant now asked for NOC along with original documents submitted by him with the bank . Bank issued NOC only after deducting 4% foreclosure charges. Complainant demands for refund of charges deducted illegally towards foreclosure and also GST he was compelled to give for getting NOC.On refusal by the bank, complainant had come before the consumer redressal commission. The points raised by the complainant were- .

·         As per the agreement, consumer is not liable to pay foreclosure charges on fixed rate Term loan up to 50 lacs .Complainant had applied for loan of Rs. 26,00,000 which is less than 50 lacs, hence charges deducted is illegal. He paid GST under pressure in order to get NOC and he is not liable for that.

·         He was never known about the foreclosure clause and was aware that there will be no penalty on pre-payment of loan amount for less than 50 lacs.

·         That the complainant falls within the definition of enterprise under Micro Small and Medium Enterprises Development Act 2006. He is  engaged in business of providing services of supplying vegetables and as per the definition of enterprise, it includes providing or rendering services

Bank argues his case and states

·          That complaint is false and vexatious .Complainant was given business loan to the complainant firm with a condition under sanction letter at clause 24 A that prepayment within three years after 12 months shall attract foreclosure charges with applicable service tax

·         Complainant is doing work of retail sale of vegetables and does not fall within the definition of enterprise.

·         Transaction between borrower and bank is  commercial in nature and hence complainant is not consumer

Observation of Commission-

·         It is an admitted fact that complainant had taken business loan and had been paying installments regularly.

·         Commission referred to RBI Circular No RBI/2011-12/589 DBOD NO Dir. BC 107/13.0/2011-12 DATED 5.6.2012 to all the scheduled commercial banks under which it was decided that the banks will not be permitted to charge foreclosure charges/pre-payment penalties on home loans on floating interest rate basis and thereafter issued another circular RBI Circular No RBI/2014-15/121 DNBS(PD)CC No 399/,3.10.42/2014-15 dated14.7.2014 in which it has been mentioned that as a measure of customer protection and also in order to bring uniformity with regard to pre-payment of various loans banks and NBFC are advised not to charge prepayment penalties on   all floating term loans to individual borrowers with immediate effect .

·         On the question as to whether complainant becomes individual borrower, reference of a judgment from Calcutta High Court was made in the matter of WP No 5521 of 2017 Defender Surana V/S Bank of Baroda & other wherein sole proprietor ship firm are legal entities and hence natural person carrying on business can enjoy benefit of individual. Bank has already admitted that consumer is running a proprietor ship firm.

·         On the question that transaction is commercial in nature  Court noticed that the circular above cited do not distinguish the type  of transaction .Term loans are given for both the purposes, for  home loan and business loan and do not distinguish.

·         Commission was also not convinced with the argument by the bank that they need to charge holding cost of the funds. Pre-payment benefits the bank to give loan further to those in the waiting.

Punjab State commission directed the bank to refund entire amount of   Rs. 101115/-with interest @9% from the date of payment till realization and also compensation of Rs5000/-

Finally after analysis of various judgments by the courts and by citing RBI various circulars & code for fair deal ,we can conclude that the  said purpose of maintaining uniformity cannot be met if different type of loan have different terms. Code for fair deal emphasizes that uniformity must be maintained .If it is so, penalty for foreclosure of loan cannot be imposed on any type of loan. Banks cannot deal with customers depriving one set of needy consumers and benefitting others. Right to equality must be born in mind while framing terms and conditions in order to avoid unfair trade practice. 

Dr Prem Lata Ex-Member ,

Consumer Commission,Delhi