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of <h1>Supreme Court Upholds RBI Interest Rate Directives, Limits Court Challenge</h1> <h3>Corporation Bank Versus D.S. Gowda and Anr.</h3> The Supreme Court ruled that Banks must adhere to RBI directives on interest rates, preventing Courts from challenging transactions compliant with these ... - Issues Involved:1. Entitlement of Banks to claim compound interest or interest with periodical rests.2. Obligation of Banks to follow Reserve Bank of India (RBI) directives on interest rates.3. Preclusion of Courts from scrutinizing transactions between Banks and borrowers under Usurious Loans Act, 1918 or similar State laws due to Section 21A of the Banking Regulation Act, 1949.4. Consideration of RBI directives as 'special circumstances' under Mysore Usurious Loans Act, 1923.Summary:Issue 1: Entitlement of Banks to Claim Compound Interest or Interest with Periodical RestsThe Supreme Court examined whether Banks can claim interest with periodical rests (monthly, quarterly, six-monthly, or yearly) or compound interest from borrowers. It was established that while charging interest with periodical rests is common in commercial banking, it is not suitable for agricultural financing due to the nature of farmers' income. The Court noted that in agricultural loans, the practice of charging compound interest or interest with quarterly rests is inappropriate and not customary.Issue 2: Obligation of Banks to Follow RBI DirectivesThe Court discussed whether Banks are bound to follow RBI directives issued u/s 21 of the Banking Regulation Act, 1949, regarding interest rates on loans/advances. It was affirmed that Banks must adhere to these directives, which are issued in public interest and have statutory backing. The Court emphasized that these directives aim to ensure uniformity and control over interest rates charged by Banks.Issue 3: Preclusion of Courts from Scrutinizing Transactions under Usurious Loans Act Due to Section 21AThe insertion of Section 21A in the Banking Regulation Act, 1949, was scrutinized to determine if it precludes Courts from examining transactions between Banks and borrowers under the Usurious Loans Act, 1918, or similar State laws. The Court held that Section 21A restricts Courts from reopening transactions on the ground that the rate of interest charged by Banks is excessive. However, this does not apply if Banks charge interest in violation of RBI directives.Issue 4: RBI Directives as 'Special Circumstances' under Mysore Usurious Loans ActThe Court evaluated whether RBI directives can be considered 'special circumstances' under Explanation 1 to Section 3 of the Mysore Usurious Loans Act, 1923. It was concluded that RBI directives indeed constitute 'special circumstances,' justifying the interest rates prescribed by them. The Court stated that interest rates fixed by RBI, considering the economic scenario, cannot be deemed unreasonable or excessive.Conclusion:The Supreme Court upheld the principle that Banks must follow RBI directives regarding interest rates and that Courts are precluded from reopening transactions based on excessive interest rates if they comply with these directives. The judgment clarified that while compound interest or interest with periodical rests is permissible in commercial loans, it is not suitable for agricultural loans due to the unique nature of farmers' income. The Court also recognized RBI directives as 'special circumstances' under the Mysore Usurious Loans Act, thereby justifying the prescribed interest rates.
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