M/S Splash Bath Appliances Inc. vs. Sidbi Bank

Facts

The petitioner, M/s Splash Bath Appliances Inc., availed financial assistance from SIDBI (Respondent No. 1) in the form of a term loan and cash credit facility. The petitioner regularly paid installments but sought to foreclose the loan due to higher interest rates compared to nationalized banks. SIDBI demanded Rs. 3,92,50,797/-, including Rs. 10,06,245/- towards prepayment charges, to issue a No Due Certificate. The prepayment charges comprised Rs. 8,29,245/- as penal interest for prepayment on the term loan plus GST, and Rs. 1,77,000/- for prepayment on the working capital limit plus GST. The petitioner objected, stating these charges were not disclosed at the time of loan sanction and were contrary to RBI guidelines. Despite paying under protest, the petitioner's complaint to the Banking Ombudsman was deemed not maintainable. This led to the present petition before the High Court.

Held

The Court held that the levy of prepayment charges by SIDBI was illegal due to non-disclosure, violating RBI circulars. The Court found that SIDBI, as an All India Financial Institution, is bound by RBI guidelines, which mandate transparent disclosure of all fees and charges to borrowers. The Letter of Intent and sanction letter did not contain any specific disclosure regarding prepayment charges. While SIDBI has the authority to levy such charges to prevent unhealthy competition, it must be disclosed transparently. Merely mentioning it in a clause on a website is not sufficient. Therefore, the Court quashed the levy of prepayment charges and directed SIDBI to refund Rs. 10,06,246/- to the petitioner within four weeks. The Court explicitly stated that there were no disputed questions of fact and that the terms of the contract did not show disclosure of these charges.

Key Issues

1. Whether the levy of prepayment charges by SIDBI (Respondent No. 1) on the petitioner's foreclosure of loan is illegal and violative of RBI guidelines, thereby entitling the petitioner to a refund of Rs. 10,06,246/-? Petitioner's arguments: The petitioner contended that SIDBI failed to disclose the levy of prepayment charges at any point during the loan sanction or in the Letter of Intent dated March 21, 2016, or the sanction letter. They relied on RBI circulars dated November 25, 2008, and November 12, 2010, which mandate transparent disclosure of all information relating to processing fees/charges to borrowers. The petitioner argued that SIDBI, as an all-India financial institution, is bound by these RBI guidelines. They cited the Delhi High Court's decision in DLF Limited v. Punjab National Bank, which held similar demands for prepayment charges as baseless due to non-disclosure, and entertained the petition on the grounds of non-compliance with RBI guidelines. Respondent's arguments: The judgment does not explicitly record arguments made by SIDBI. However, it notes SIDBI's contention that prepayment charges are levied in the course of its banking activities and business, similar to other financial institutions and public sector banks, and that the petitioner's objections were not acceptable.