Hon'ble Judges/Coram:
A.M. Ahmadi and S.C. Agrawal

JUDGMENT

A.M. Ahmadi, J.

1. These appeals brought by the aforementioned Banks by special leave raise certain important questions of law touching the business activities of the Banks in the matter of grant of loans/advances and recovery thereof which may be formulated as under:

1. Whether the Bank is entitled to claim interest with periodical rests, e.g., a monthly rest, a quarterly rest, a six monthly rest, or a yearly rest, or compound interest in any other manner, from a borrower who had obtained a loan or an advance for agricultural/commercial purpose, as the case may be?

2. Whether the Banks are bound to follow the directives/circulars issued by the Reserve Bank of India in exercise of power conferred by Section 21 of the Banking Regulation Act, 1949 prescribing the structure of interest to be charged on loans/advances made from time to time, and if yes, to what extent?

3. Whether in view of the insertion of Section 21A in the Banking Regulation Act, 1949 by Banking Loans (Amendment) Act, 1983 (Act No. 1 of 1984), Courts are precluded from the subjecting transactions entered into between Banks and borrowers from scrutiny under the provisions of the Usurious Loans Act, 1918 or any other similar State law, with a view to giving relief thereunder, and, if yes, whether relief under such laws is wholly impermissible?

and

4. Whether the directives/circulars issued by the Reserve Bank of India under Section 21 of the Banking Regulation Act, 1949 can be termed as a 'special circumstance within the meaning of Explanation 1 to Section 3 of the Mysore Usurious Loans Act, 1923 (Mysore Act No. IX of 1923)? If yes, what is its effect?

These questions which have a bearing on the day to day transactions of loan/advance entered into by the Banks arise in the following background.

2. In Bank of India v. Rao Saheb Krishna Rao Desai (1980) 2 Karnataka Law Journal 495, the Bank had advanced a loan for purchasing a tractor to improve the agricultural land. The borrower executed a promissory note as also a hypothecation deed whereby he agreed to repay the said sum on demand with interest at 4.5% per annum over the Reserve Bank rate, minimum being 9.5.% per annum 'with quarterly rests'. The original rate fixed was 10.5% per annum. On the failure of the borrower to adhere to the terms of the loan, the Bank instituted a suit for recovery of the loan -wherein it claimed compound interest on the strength of the term 'with quarterly rests'. The suit was decreed by the trial court with future interest at 10.5% per annum........