Levying foreclosure charges on MSME loans is contrary to RBI directives and regulatory framework

Orissa High Court Quashes Foreclosure Charges on MSME Loans by Indian Bank Court Orders Immediate Release of Title Deeds, Deems Bank's Actions Unlawful and Arbitrary

In a landmark judgment, the Orissa High Court ruled against Indian Bank for imposing foreclosure charges on loans extended to Maa Tarini Poultries Pvt. Ltd., a registered MSME, declaring such charges illegal under Reserve Bank of India (RBI) directives. The judgment was delivered by Justice Dr. Sanjeeb K Panigrahi, who emphasized that the bank’s actions were contrary to public policy and regulatory mandates.

The case originated when Maa Tarini Poultries Pvt. Ltd. sought relief from the court against Indian Bank's demand for foreclosure charges following the complete repayment and takeover of its loans by HDFC Bank. The petitioner argued that the foreclosure charges were unjustified and against RBI guidelines, which prohibit such penalties on MSME loans. Furthermore, the bank retained the petitioner's original title deeds and collateral documents despite the full settlement of dues.

Justice Panigrahi criticized the bank's insistence on foreclosure penalties, highlighting that RBI's directives are binding on banks and aim to facilitate credit mobility and prevent anti-competitive practices. The court observed that the imposition of these charges was arbitrary, unlawful, and violative of Article 14 of the Constitution, which ensures equality before the law.

The court also addressed the bank's failure to expedite an insurance claim process for the petitioner following a natural calamity, noting that the delay caused significant financial strain on the MSME. The judgment stressed the bank's fiduciary duties to act in good faith and without coercion, as evidenced by the undue pressure exerted on the petitioner to purchase specific insurance policies.

In conclusion, the Orissa High Court ordered Indian Bank to immediately release all original documents held as collateral to the petitioner and refrain from demanding foreclosure charges. The judgment reinforces the importance of adherence to regulatory frameworks and fair banking practices, particularly concerning MSMEs, which are vital to the national economy.

Bottom Line:

MSME loans - Levying foreclosure charges on MSME loans is contrary to RBI directives and regulatory framework. Banks cannot impose foreclosure or pre-payment penalties on floating-rate credit facilities extended to MSMEs. Retention of title deeds and collateral documents by the bank after full repayment is arbitrary and violative of proprietorial rights.

Statutory provisions: Banking Regulation Act, 1949 Sections 21, 35A; Indian Contract Act, 1872 Section 23; Article 300-A of the Constitution; Competition Act, 2002 Section 3

Maa Tarini Poultries Pvt. Ltd. v. Indian Bank, (Orissa) : Law Finder Doc Id # 2818252