Holding

Section 21-A is a valid enactment within Parliament's power and courts cannot reopen banking transactions to reduce contractually agreed interest rates.

Summary

State Bank of India filed a suit for recovery of money against Y. Venkateswara Rao, obtaining a preliminary decree in its favour which was upheld by the District Court. After the decree, Section 21-A was inserted into the Banking Regulation Act, 1949 by the Banking Laws (Amendment) Act, 1984, prohibiting courts from reopening banking transactions on the ground of excessive interest. The respondent appealed to the High Court, which held Section 21-A ultra vires and set aside the decree. The Supreme Court held that Section 21-A is within Parliament's legislative competence under Entry 45 of List I of the Seventh Schedule and is therefore valid. It further ruled that the rate of interest is a matter of contract between the parties and courts cannot interfere to reduce a contractually agreed compound interest on a mortgage. Consequently, the appeal of the bank was allowed, the High Court judgment was set aside and the lower appellate court's decree restored.

Issues considered

Whether Section 21-A of the Banking Regulation Act, 1949 is intra vires Parliament's legislative competence under the Constitution of India.
Whether courts may reopen a banking transaction on the ground that the interest rate charged is excessive.

Legislation cited

Banking Regulation Act, 1949s. 21-A
Constitution of Indias. Art. 245, s. Art. 246, s. Sch. VII List I Entry 45, s. Sch. VII List II Entry 30
Usurious Loans Act, 1918

Subjects

Banking Regulation ActSection 21-Ainterest rateusurious loanscontractual interestmortgageconstitutional validityParliamentary competenceList I Entry 45List II Entry 30ultra viresSupreme Court

Judgment

·-
,.....
-t STATE BANK OF INDIA
v.
YASANGI VENKATESWARA RAO
A

JANUARY 21, 1999

[B.N. KIRPAL ANDS. RAJENDRA BABU, JJ.] B
_...

Banking Regulation Ac~ 1949:

Section 21-A (as inselted in 1984)-Provided that banking transaction
not to be reopened by any cowt on ground that interest rate of such transac- c
tion is excessive--Preliminary decree was passed by trial coult in a suit for
recovery of money and upheld in appeal by District Coult-However,• High
Coult allowed second appeal on the ground that S.21-A was ultra vires-Held:
S.21-A deals with question of rate of interest. charged by a banking company,
whether to an agricultwist or non-agricultwist-1herefore, reference to Enfly
30 of List II dealing with relief of agriculture indebtedness is of no conse- D
quence-Hence, S.21-A is validly enacted and High Coult erred in holding
that Parliament has no jurisdiction to enact S.21- A-Constitution of India,
1950, Ans 245 and 246, Sch. VII List I, Ent1y 45 & List II Ent1y 30.

Banking company-Interest-Charging of-Rate of-Mo1tgage-Held : E
Rate of interest is a matter of contract between the palties-Hence, coult
cannot interfere in respect of an agreement stipulating charging of compound
interest in respect of the amount advanced against a moltgage-:-f.!surious
Loans Act, 1918.

The appellant-Bank filed a suit for recovery of money against the F
,,. respondent before the Trial Court. A preliminary decree was passed by the
Trial Court in favour of the appellant, which was upheld by the District
Court.

Mter the decree of the Trial Court Section 21-A was inserted in the
Banking Regulation Act, 1949, which provided that a banking transaction
G
~"'!' .;--~: was not to be reopened on the ground that the rate of interest charged by
the banking company in respect of such transaction was excessive.

The respondent filed a second appeai before the High Court contend~
ing that in view of Section 21-A of the Act there would be no occasion for H
213
214 SUPREME COURT REPORTS (1999] l S.C.R.

A the court to reduce the rate of interest which the borrower had contracted
+ ...
to· pay. While allowing the second appeal, the High Court bad declared ......,
Section 21·A or the Act ultra vires. Hence this appeal.

Allowing the appeal, this Court

B HELD : 1. There Is no doubt that Section 21-A or the Banking
Regulation Act, 1949 deals with the question of the rate or interest which 4.
can be charged by a banking company. Entry 45 of List I of the Seventh
Schedule clearly empowers the Parliament to legislate with regard to
banking. The enactment of Section 21-A was clearly within the domain of
c the Parliament. The said Section applies to all types of loans which are
granted by a banking company, whether to an agriculturist or a non·
agriculturist, and therefore, reference by the High Court to Entry 30 of
List II dealing with agricultural indebtedness was of no con5equence.
Hence,· High Court erred in holding that Parliament had no jurisdiction
D to enact Section 21·A. (216·8-C]

2. Entering into a mortgage is a matter of contract between the
parties. If the parties agree that In respect of the amount advanced against
a mortgage, compound Interest will be paid, court cannot interfere and
reduce the amount of interest agreed to be paid on the loan so taken. The
E mortgaging of a property Is with a view to secure the loan and bas no
relation whatsoever with the quantum of interest to be charged. [216·D·E]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4607 of
1989.
F
From the Judgment and Order dated 16.10.85 of the Andbra Pradesh
High Court in S.A. No. 972 of 1984. "'
K.N. Rawat Additional Solicitor General, Sanjay Kapur, Rajiv Kapur,
(M.K. Michael} (NP} for the Appellant.
G
The Judgment of the Court was delivered by
'"'/- ..
... ,..
KIRPAL, J. The challenge in this appeal is to judgment of the High
Court which, while allowmg the appeal filed by the respondent, had
H declared Section 21-A of the Banking Regulation Act as being ultra vires.
S.B.I. v. Y.V. RAO [KIRPAL, J.) 215
...
-
~ Briefly stated the facts are that a suit for recovery of money was filed A
by the appellant before the District Munsif, Eluru. The Trial Court passed
a preliminary decree and the same was substantially upheld by the District
Court.

In the second appeal which was filed, one of the contentions which
was raised related to the charging of interest by the appellant. After the B
~
decree of the Trial Court, by the Banking Laws (Amendment) Act 1 of
1984, new Section 21-A was inserted in the Banking Regulation Act. The
said Section reads as follows.

"Notwithstanding anything contained in the Usurious Loans
Act, 1918 or any other law relating to indebtedness in force in any
c
State, a transaction between a banking company and its debtor
shall not be reopened by any court on the ground that the rate of
interest charged by the banking company in respect of such trans-
action is excessive."
D
;i.. Relying upon this provision, the contention of the appellant was that
there would be no oceasion for the court to reduce the rate of interest
which the borrower had contracted to pay.

The High Court in the second appeal, even without an issue being
framed to this effect, entertained the plea regarding the validity of the said
E
Section and observed as follows :

"Considering the fact that grant of debt relief has always been
treated in our country as a legislative subject to be passed upon
by the regional Governments alone and that the words "Relief of F
.. agricultural indebtedness" were specially added by our Constitu-
tion to enable the State Legislatures to alleviate the suffering of
the farmers from their agricultural indebtedness and that the
Constituent Assembly had deliberately rejected an amendment
moved seeking to transfer this item to the concurrent list, I hold
G
-~~ ,. that Section 21-A of the Banking Companies Regulation Act which
forbids the Courts from reopening the bank loans on the ground
of excessive interest is not a law enacted by the Parliament ".'1th
respect to the item of Banking."

The learned Additional Solicitor General contends that the aforesaid H

•
216 SUPREME COURT REPORTS [1999] 1 S.C.R.
A observation of the High Court is not correct. He also submits that the High -+ ...
Court qad erred in observing that "normally where security offered by the ..
debtor, is good and adequate as it is in a case of mortgage of property, the
Courts will hold charging of compound interest to be excessive."

We are unable to understand as to how the High Court could come
B to the conclusion that the Parliament had no jurisdiction to enact Section
21-A. There can be no doubt that Section 21-A deals with the question of
the rate of interest which can be charged b~ a banking company. Entry 45
of List" I of the Seventh Schedule clearly 1empowers the Parliament to
legislate with regard to banking. The enactment of Section 21-A was clearly
C within the domain of the Parliament. The said Section applies to all types
of loans· which are granted by a banking company, whether to an agricul-
turist or a non-agriculturist, and, therefore, reference by the High Court to
Entry 30 of List II was of no consequence. In our opinion, the said Section
21-A had been validly enacted.

D We also find it difficult to agree with the observation of the High
Court that normally when a security is offered in the case of mortgage of
property, charging of compound interest would be regarded as excessive.
Entering into a mortgage is a matter of contract between the parties. If the
parties agree that in respect of the amount advanced against a mortgage
E compound interest will be paid, we fail to understand as to how the court
can possibly interfere and reduce the amount of interest agreed to be paid
on the loan so taken. The mortgaging of a property is with a view to secure
the loan and has no relation whatsoever with the quantum of interest to be
charged.

F With the aforesaid observations, this appeal is allowed, the judgment
and dec~ee of the High Court is set aside and that of the lower appellate
court restored. No order as to costs.

v.s.s.' . Appeal allowed.