M/S Vasu And Sons And Another vs. Union Bank Of INDIA And Others

Facts

The petitioners, M/s Vasu and Sons, challenged an order dated 27.03.2025 by the Banking Ombudsman rejecting their complaint, and the deduction of Rs. 23,36,219/- by Union Bank of India (respondent No. 2). The petitioners had availed a cash credit facility of Rs. 5 crores in January 2023. They sought to close the facility in April 2023, claiming to have repaid the entire amount with interest from their own resources. However, the bank debited a penalty of 4% plus GST, citing a violation of terms. The sanction letter stipulated a 4% penalty plus GST if the account was taken over by another bank within 12 months of the first availment. The bank stated the petitioners repaid the loan by obtaining a new facility from HDFC Bank, violating RBI guidelines and the agreed terms.

Held

The Court held that the Banking Ombudsman's order was well-reasoned and did not suffer from manifest illegality or arbitrariness. The Court found that the petitioners' allegations were unsubstantiated and that they had indeed violated the terms and conditions of the sanction letter by obtaining a loan from another bank to discharge their liability. The Court noted that the 2015 Code is a voluntary commitment and does not have statutory force, thus disagreeing with the petitioners' submission that no penalty could be levied based on it. The Court further reasoned that penalty charges are levied to discourage borrowers from switching banks and to uphold contractual obligations. It emphasized that parties to a contract must perform their promises as per Section 37 of the Indian Contract Act, 1872. The Court also reiterated the principle that courts should exercise restraint in judicial review of contractual or commercial matters, citing the Supreme Court judgment in Silppi Constructions Vs. Union of India and Another. Consequently, the Court found no illegality in the bank's action and dismissed the petition.

Key Issues

1. Whether the Banking Ombudsman's order dated 27.03.2025, rejecting the petitioners' complaint, is arbitrary or illegal, particularly in light of the Code of Bank’s Commitment to Micro and Small Enterprises, 2015 (2015 Code)? 2. Whether the deduction of Rs. 23,36,219/- by Union Bank of India as penalty charges is illegal, considering the petitioners' contention that the 2015 Code prohibits pre-payment penalties on floating interest rate loans? Petitioner's arguments: The petitioners contended that the 2015 Code, which is a voluntary commitment by banks, stipulates that no pre-payment penalties should be levied on loans with floating interest rates. They argued that the bank's action of levying a penalty was arbitrary and in violation of this commitment. Respondents' arguments: The Union Bank of India argued that as per the agreed terms and conditions at the time of availing the cash credit facility, there was a lock-in period of one year. The petitioners violated these terms by repaying the loan from their own resources, which they concealed, having obtained a loan from HDFC Bank. This action was in violation of RBI guidelines.