Agricultural loan interest rules bar compound interest on current dues; overdue amounts may be added to principal under RBI directives.

Banks could not treat agricultural advances like commercial loans by charging compound interest at half-yearly or quarterly rests. The RBI circulars governing agricultural finance drew a clear distinction between current dues and overdue amounts: interest on current dues in agricultural loans was not to be compounded, while overdue crop-loan instalments could have outstanding interest added to principal. Section 21-A of the Banking Regulation Act, 1949 did not authorise banks to charge interest contrary to those directives; it only prevented reopening of accounts on the ground that interest was excessive or unreasonable. The bank was therefore not justified in levying compound interest on the agricultural loan.

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Issues: Whether a bank could charge compound interest with half-yearly or quarterly rests on agricultural advances, and whether the Reserve Bank of India circulars permitted compounding on current dues or overdue amounts.

Analysis: The circulars and directives governing agricultural finance drew a clear distinction between commercial loans and agricultural advances. Interest on current dues in agricultural loans was expressly not to be compounded. Where crop loans or instalments became overdue, interest outstanding could be added to principal, but the circulars did not permit banks to treat agricultural advances on par with commercial loans by charging compound interest at close periodic rests. Section 21-A of the Banking Regulation Act, 1949 only barred reopening of accounts on the ground that interest was excessive or unreasonable and did not authorise charging interest contrary to the Reserve Bank's directives.

Conclusion: The bank was not justified in charging compound interest with half-yearly rests on the agricultural loan, and the appeal failed.

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