M/S Innovative Soch vs. Union Bank Of INDIA And Others

Facts

The petitioner, M/s Innovative Soch, challenged an order dated 26.03.2025 by the Banking Ombudsman (respondent No.4) rejecting its complaint, and the deduction of Rs.23,36,625/- by Union Bank of India (respondent No.2). The petitioner had availed a cash credit facility in January 2023 and sought to close it in April 2023, repaying the entire amount. However, the bank debited penalty charges. The petitioner argued that the Code of Bank’s Commitment to Micro and Small Enterprises, 2015, prohibits pre-payment penalties on floating rate loans to MSMEs. The bank contended that the sanction letter stipulated a one-year lock-in period with a 4% penalty plus GST if the account was taken over by another bank within 12 months, and the petitioner had obtained a loan from HDFC Bank to repay the liability, violating RBI guidelines.

Held

The Court held that the Banking Ombudsman's order was well-reasoned and did not suffer from manifest illegality or arbitrariness. Regarding the first issue, the Court found that the petitioner's grievances were considered and found to be untrue. The Court noted that the 2015 Code is a voluntary commitment by banks and does not have statutory force, thus disagreeing with the petitioner's submission that no penalty charges could be levied based on it. Concerning the second and third issues, the Court found that the penalty charges were levied in accordance with the terms and conditions of the sanction letter, which the petitioner had agreed to. The Court emphasized that commercial banks profit from lending, and penalty charges discourage borrowers from switching banks arbitrarily, upholding contractual obligations. The Court also cited Section 37 of the Indian Contract Act, 1872, regarding the obligation of parties to perform their promises. Furthermore, the Court applied the principle of restraint in judicial review of contractual or commercial matters, referencing the Supreme Court's judgment in Silppi Constructions Vs. Union of India and Another, (2020) 16 SCC 489, and concluded that no illegality warranting interference in writ jurisdiction was found.

Key Issues

1. Whether the Banking Ombudsman's order dated 26.03.2025, rejecting the petitioner's complaint, suffers from manifest illegality or arbitrariness, particularly concerning the levy of penalty charges by Union Bank of India. 2. Whether the levy of a 4% penalty plus GST by Union Bank of India on the early closure of the cash credit facility is in violation of the Code of Bank’s Commitment to Micro and Small Enterprises, 2015, as argued by the petitioner. 3. Whether the petitioner's repayment of the cash credit facility using funds from another bank (HDFC Bank) constituted a violation of the terms and conditions of the sanction letter, justifying the penalty, as argued by the respondents. Petitioner's Contention: The petitioner argued that the Code of Bank’s Commitment to Micro and Small Enterprises, 2015, prohibits pre-payment penalties on loans with floating interest rates, and the bank's action was arbitrary. The petitioner also relied on the principle that banks shall not levy pre-payment penalties on loans extended to MSME borrowers if the interest rate is floating. Respondents' Contention: The respondents (Union Bank of India) argued that the sanction letter clearly stipulated a one-year lock-in period and a 4% penalty plus GST if the account was taken over by another bank within 12 months. They further contended that the petitioner concealed obtaining a loan from HDFC Bank to discharge its liability, which is a violation of RBI guidelines and the agreed terms.