M.Yogam Naidu vs. The Bank Of Baroda

Facts

The petitioner, an individual borrower, sought a writ of Mandamus to declare the respondent bank's demand for prepayment charges of Rs. 52,47,315/- on a term loan as illegal and arbitrary. The petitioner argued that these charges violated RBI circulars dated 07.05.2014 and 02.08.2019, which prohibit such charges on floating rate term loans for individual borrowers not for business purposes. The petitioner also contended that the loan was taken over by Axis Bank, and the respondent bank had accepted a demand draft for full liquidation without mentioning prepayment charges, thus waiving their right. The respondent bank argued that the loan was for a real estate project, classifying the petitioner as a business borrower not covered by the RBI circulars. They also pointed to a clause in the loan sanction letter requiring prepayment charges and stated that the loan was not 'closed' but 'prepaid' and that Axis Bank was a competitor.

Held

The Court held that the petitioner was an individual borrower and the credit facility sanctioned for constructing a commercial complex in his property, without him being involved in buying or selling property for profit, could not be construed as a 'commercial loan' or 'business loan'. Therefore, the RBI Circulars dated 07.05.2014 and 02.08.2019, prohibiting prepayment charges on floating rate term loans to individual borrowers for purposes other than business, were applicable. The Court found that the specific clause in the loan sanction letter requiring prepayment charges could not bind the petitioner in view of the overriding RBI circulars. Furthermore, the Court noted that the respondent bank had appropriated the amount from Axis Bank's demand draft towards foreclosure without mentioning prepayment charges, estopping them from demanding such charges later. The Court also held that the transfer of the loan amount should be considered a 'takeover' and not a 'prepayment' or 'closure'. Consequently, the petitioner was entitled to the repayment of the prepayment charges paid under protest. The respondent bank was directed to repay Rs. 52,47,315/- with 12% interest per annum from the date of payment to the date of repayment within sixty days.

Key Issues

1. Whether the respondent Bank is entitled to collect prepayment charges @ 2% per annum on the balance amount of loan and for the residual period of prepayment, considering the RBI Circulars dated 07.05.2014 and 02.08.2019? The petitioner argued that as an individual borrower with a floating rate term loan not for business purposes, the RBI circulars squarely applied, prohibiting such charges. The respondent bank contended that the petitioner availed the loan for a real estate project, making it a business loan and thus outside the purview of the circulars, and that a specific clause in the loan agreement bound the petitioner to pay these charges. 2. Whether the petitioner is entitled to the return of Rs. 52,47,315/- paid to the respondent Bank towards prepayment charges? The petitioner argued that the payment was made under protest and that the bank's actions were illegal and arbitrary, citing waiver and the nature of loan takeover. The respondent bank argued that the payment was not a full and final settlement and that the petitioner was liable as per the loan agreement.