Orissa High Court
M/S. Pratistha Engineering vs State Bank Of India & Ors. .... Opposite ... on 9 May, 2025
Author: S.K. Panigrahi
Bench: S.K. Panigrahi
Signature Not Verified
Digitally Signed
Signed by: BHABAGRAHI JHANKAR
Reason: Authentication
Location: ORISSA HIGH COURT, CUTTACK
Date: 14-May-2025 18:57:31
IN THE HIGH COURT OF ORISSA AT CUTTACK
W.P.(C) No.5653 of 2025
along with
W.P.(C) No.31627 of 2024
(In the matters of Petitions under Articles 226 and 227 of the
Constitution of India, 1950).
M/s. Pratistha Engineering .... Petitioner(s)
Limited, Bhubaneswar
(in both the Writ Petitions)
-versus-
State Bank of India & Ors. .... Opposite Party (s)
Advocates appeared in the case through Hybrid Mode:
For Petitioner(s) : Mr. Ramachandra Panigrahy, Adv.
For Opposite Party (s) : Mr. Jagabandhu Sahoo, Sr. Adv.
Along with
Mr. Dillip Kumar Mohapatra, Adv.
CORAM:
DR. JUSTICE S.K. PANIGRAHI
DATE OF HEARING:-13.03.2025
DATE OF JUDGMENT:-09.05.2025
Dr. S.K. Panigrahi, J.
1. Since common questions of fact and law are involved in the above-
mentioned Writ Petitions, the same were heard together and are being
disposed of by this common judgment. However, this Court finds it
Location: ORISSA HIGH COURT, CUTTACK
appropriate to treat W.P.(C) No.3167 of 2024 as the leading case for
proper adjudication of these matters.
2. The Petitioner in W.P.(C) No.3167 of 2024 is challenging the letter dated
13th November, 2024 issued by the Opposite Party Bank, whereby the
sanctioned Fund-Based Working Capital (Cash Credit) limit in the
Petitioner's account was reduced from ₹14 Crore to ₹6 Crore.
3. The Petitioner is further challenging the action of the Opposite Party
Bank in levying penal interest and compounding the same on a monthly
basis, as well as the classification of his account as a Non-Performing
Asset.
I. FACTUAL MATRIX OF THE CASE:
4. The brief facts of the case are as follows:
(i) The Petitioner is engaged in the business of construction, including the
undertaking of contracts and sub-contracts for government and public
sector undertakings, such as the National Highways Authority of India.
(ii) The Petitioner had been availing various credit facilities from the
Respondent Bank, including a Cash Credit facility through the primary
account, and was concurrently operating Bank Guarantee and
Guaranteed Emergency Credit Line accounts as secondary accounts.
(iii) These facilities were fully secured by a mortgage over several
immovable properties, having a collective market value approximately
three times the sanctioned Cash Credit limit of ₹14 Crore.
(iv) In 2017, the Petitioner was awarded a sub-contract by the National
Project Implementation Agency of India. In order to comply with
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contractual obligations, the Petitioner requested the Bank to issue the
requisite performance Bank Guarantee.
(v) The Respondent Bank issued multiple assurances through letters dated
23.06.2017, 10.07.2017, 21.07.2017, and 16.08.2017, confirming the
proposed issuance of the Bank Guarantee. However, the Bank did not
proceed with the issuance of the guarantee, which led to the forfeiture
of the earnest money deposit amounting to ₹3.23 Crore.
(vi) Subsequently, the Petitioner secured another substantial contract
valued at ₹90 Crore from PSK Infrastructure & Projects Pvt. Ltd. The
Petitioner once again requested an enhancement of the Cash Credit
limit and issuance of the requisite Bank Guarantee. The Respondent
Bank, however, failed to act on the request, leading to the loss of the
contract and the corresponding opportunity to generate significant
business revenue.
(vii) Despite repeated representations and formal requests made by the
Petitioner for enhancement of the credit limit and issuance of Bank
Guarantees, there was no substantive response from the Respondent
Bank.
(viii) As on 08.11.2024, the sanctioned Cash Credit limit continued to be ₹14
Crore, as reflected in the Bank's official records.
(ix) However, on 13.11.2024, the Respondent Bank reduced the sanctioned
Cash Credit limit from ₹14 Crore to ₹6 Crore, citing irregularity in the
account and non-receipt of repayments.
(x) In addition to the said reduction, the Bank levied penal interest
amounting to approximately ₹1.22 Crore and capitalized the same by
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compounding it on a monthly basis, thereby increasing the Petitioner's
financial liability.
(xi) Aggrieved by the unilateral reduction of the sanctioned credit limit and
the imposition of penal interest, the Petitioner filed W.P.(C) No. 31627
of 2024 before this Court.
(xii) Subsequently, on 30.12.2024, the Respondent Bank classified the
Petitioner's Cash Credit account as a Non-Performing Asset,
notwithstanding the existence of underlying disputes and the pendency
of W.P.(C) No. 31627 of 2024.
(xiii) The Petitioner, being further aggrieved by the classification of the
account as NPA, has approached this Court by filing the W.P.(C) No.
5653 of 2025.
II. SUBMISSIONS ON BEHALF OF THE PETITIONER:
5. Learned counsel for the Petitioner earnestly made the following
submissions in support of his contentions:
(i) The Petitioner submitted that he is a contractor/sub-contractor for
various organisations, including NHAI. In 2017, he secured a sub-
contract from NPIAI and, accordingly, requested the Respondent Bank
to issue a Bank Guarantee/Performance Guarantee as required by the
employer. Despite issuing several assurances through letters dated
23.06.2017, 10.07.2017, 21.07.2017, and 16.08.2017, the Bank failed to
issue the Bank Guarantee, resulting in forfeiture of the Petitioner's
earnest money deposit of ₹3.23 Crores with NHAI.
Location: ORISSA HIGH COURT, CUTTACK
(ii) The Petitioner further submitted that he subsequently obtained a
contract worth ₹90 Crores from PSK Infrastructure & Projects Pvt. Ltd.
and again sought issuance of Bank Guarantee and enhancement of the
credit limit. The Bank again failed to act, causing the Petitioner to lose
both the contract and significant financial investment.
(iii) The Petitioner submitted that, as on 08.11.2024, the Respondent Bank
maintained a Cash Credit limit of ₹14 Crores. However, on 13.11.2024,
the Bank abruptly reduced the limit to ₹6 Crores without furnishing any
prior notice or justification.
(iv) The Petitioner contended that the said coercive action was in violation
of the Reserve Bank of India's Circular dated July 2009, specifically
Clause 2.1.2, which sets out the conditions under which a Cash Credit
account may be classified as a Non-Performing Asset.
(v) The Petitioner further submitted that none of the conditions stipulated
under Clause 2.1.2 of the RBI Circular dated 01.07.2009, which defines
when a Cash Credit account may be treated as "Out of Order," were
satisfied in the present case. Accordingly, the classification of the
account as a Non-Performing Asset on 30.12.2024 was arbitrary and
unlawful. The Petitioner submitted that the Respondent Bank failed to
produce any documentary evidence to show that the account was
overdrawn for a continuous period of 90 days, that there were no credits
in the account for 90 days, or that the credits were insufocient to cover
the interest debited, each of which is a mandatory criterion under the
RBI guidelines for such classification.
Location: ORISSA HIGH COURT, CUTTACK
(vi) The Petitioner further submitted that, between 01.10.2024 and
13.11.2024, he deposited a total of ₹2.03 Crores into the account (₹2
Crores on 01.10.2024 and ₹3 Lakhs on 22.10.2024), thereby establishing
that regular credits had been made within the 90-day period preceding
the classification.
(vii) The Petitioner submitted that the account was not overdrawn during
the period from 13.08.2024 to 13.11.2024, except for a single day, i.e.,
30.09.2024, which was promptly regularised the following day through
a deposit of ₹2 Crore. The Petitioner contended that a one-day
overdrawing, immediately rectified, does not meet the threshold for
classifying an account as 'Out of Order' under the RBI guidelines or
prevailing judicial interpretation. In support of this submission, the
Petitioner relied upon the judgment in Rita Bagga v. Union of India1.
(viii) The Petitioner submitted that, as on 30.12.2024, the outstanding amount
in the account stood at ₹12.93 Crores, which was well within the
sanctioned Cash Credit limit of ₹14 Crores. A further credit of ₹50 Lakhs
was made on 31.12.2024, underscoring that the account was active and
being regularly operated.
(ix) The Petitioner further submitted that the Respondent Bank has charged
and capitalized approximately ₹1.22 Crores as penal interest, an action
that is impermissible in law. It was submitted that the Bank has
consistently imposed and compounded penal interest since the
inception of the loan account, despite regular repayments having been
2015 SCC Online All 7562.
Location: ORISSA HIGH COURT, CUTTACK
made by the Petitioner. In support of this argument, the Petitioner relied
upon the observations of the Supreme Court in Central Bank of India
v. Ravindra2, wherein it was categorically held that penal interest
cannot be capitalized or compounded. The Petitioner further placed
reliance on the RBI Circular dated 18.08.2023, which expressly prohibits
all banks from charging or capitalizing penal interest, clarifying that
such interest must be treated separately from contractual interest.
(x) The Petitioner contended that the unlawful levy and compounding of
penal interest effectively prevented him from fully utilizing the
sanctioned Cash Credit limit, thereby causing significant business
disruption and financial loss.
(xi) The Petitioner submitted that, in the counter afodavit filed by the
Respondent Bank in W.P. No. 31627 of 2024 on 16.01.2025, it was
admitted that the Petitioner's account was "indirectly saving" itself
from being declared an NPA, indicating that, as of that date, the account
had not yet been classified as such. However, in a subsequent reply filed
on 05.02.2025 in I.A. No. 1594 of 2024, the Respondent Bank took a
contradictory position, asserting that the account had already been
declared an NPA on 30.12.2024. The Petitioner contended that these
inconsistent statements demonstrate procedural impropriety and a lack
of transparency, further vitiating the Bank's decision to classify the
account as a Non-Performing Asset.
AIR 2001 SC 3095.
Location: ORISSA HIGH COURT, CUTTACK
(xii) The submitted that, in view of the foregoing submissions, this Court
may be pleased to declare the classification of the account as a Non-
Performing Asset on 30.12.2024 as illegal, arbitrary, and in violation of
the applicable RBI guidelines and binding judicial precedents.
III. SUBMISSIONS ON BEHALF OF THE OPPOSITE PARTY:
6. The Learned Counsel for the Opposite Party earnestly made the
following submissions in support of his contentions:
(i) The present writ petition is not maintainable under Article 226 of the
Constitution of India. The issues raised, such as the levy of penal
interest, reduction of credit limits, and classification of the account as a
Non-Performing Asset, involve disputed questions of fact and
commercial decisions. These matters require adjudication through oral
and documentary evidence and are, therefore, best suited for a civil
court rather than for resolution under writ jurisdiction.
(ii) The reduction of the Cash Credit limit from ₹14 Crores to ₹6 Crores was
a commercial decision based on the Petitioner's financial condition and
creditworthiness. It does not involve any illegality or breach of statutory
obligation. Accordingly, no cause of action arises for invoking the
extraordinary jurisdiction of this Court.
(iii) The principle of promissory estoppel is not applicable in the present
case. The Petitioner expressly accepted the phased reduction of the
credit limit as recorded in the sanction letter dated 14.12.2023. The said
communication clearly stated that the limit would be reduced to ₹9
Crores by February 2024 and further to ₹6 Crores by October 2024.
These terms were acknowledged by the Petitioner in his letter dated
Location: ORISSA HIGH COURT, CUTTACK
21.05.2024. Without challenging the original sanction, the Petitioner
cannot now legally assail the consequent reduction of the limit.
(iv) The allegation regarding the capitalization of penal interest is
unfounded. During the period from 01.04.2024 to 10.12.2024, no
instance of penal interest being capitalized has occurred. While penal
interest may have been levied, it was not subjected to compounding.
The Petitioner has failed to identify any specific entries in the account
statements to support the allegation. Consequently, there is no breach
of any prevailing judicial pronouncements or the RBI Circular dated
18.08.2023.
(v) The valuation of the securities offered by the Petitioner has been
exaggerated. As per the valuation report of the Bank's appointed valuer,
the market value of the mortgaged properties is ₹14 Crores, the
realizable value is ₹13.68 Crores, and the government valuation is ₹8.04
Crores. The Petitioner's claim that the value exceeds ₹70 Crores is
unsupported and contrary to the documentary evidence available on
record.
(vi) The Petitioner has been availing credit facilities from the respondent
Bank since 2006. The most recent renewal was communicated on
14.12.2023, which clearly recorded a phased reduction in the Cash
Credit limit. These terms were accepted by the Petitioner. The reduction
implemented on 13.11.2024 was in accordance with the agreed terms.
The Petitioner's failure to challenge the original renewal terms bars any
challenge to the subsequent implementation.
Location: ORISSA HIGH COURT, CUTTACK
(vii) The Petitioner was fully aware of the proposed reduction and associated
timelines. Letters dated 21.05.2024 and 16.11.2024 confirm that the
Petitioner was cognizant of the revised limit and the October 2024
deadline. Therefore, the reduction from ₹14 Crores to ₹6 Crores on
13.11.2024 cannot be said to be abrupt or violative of any obligation.
(viii) The Petitioner's audited financial statements for the financial years
2022-23 and 2023-24 disclose net losses of ₹3.08 Crores and ₹7.01 Crores
respectively. There was insufocient cash flow to service the sanctioned
credit facility. The Bank's statutory auditor had flagged the account as
stressed. Given the Petitioner's financial position, the Bank's credit
decisions were prudent and justified.
(ix) The Petitioner has instituted multiple proceedings, including a
complaint before the National Consumer Disputes Redressal
Commission seeking enhancement of the credit limit. This conduct
demonstrates a pattern of parallel and vexatious litigation. The present
writ petition appears to be another attempt to misuse legal process.
(x) In light of the above, the writ petition is liable to be dismissed as
misconceived, devoid of merit, and an abuse of the writ jurisdiction of
this Court.
IV. COURT'S REASONING AND ANALYSIS:
7. Heard the learned counsel for the Parties and perused the materials
placed on record.
8. The central controversy which falls for adjudication in the present writ
petition is threefold:
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I. Whether the reduction of the sanctioned Cash Credit limit by the
Respondent Bank from ₹14 Crores to ₹6 Crores, as communicated
on 13.11.2024, was legally justified and carried out in accordance
with due procedure
II. Whether the classification of the Petitioner's Cash Credit account
as a Non-Performing Asset (NPA) on 30.12.2024 was in
compliance with the applicable guidelines issued by the Reserve
Bank of India and supported by the relevant facts;
III. Whether the Respondent Bank levied and capitalised penal
interest in violation of judicial decisions and regulatory
directions, and if so, whether such action is sustainable in law.
9. It is trite law that a clear distinction must be drawn between contractual
interest and penal interest. While the former operates as compensation
for the time value of money, the latter serves as a punitive imposition
for the borrower's failure to comply with repayment obligations.
10. In Ravindra (supra), the Supreme Court articulated the legal position
on penal interest, observing that such interest constitutes a penalty and
cannot be capitalised. It was categorically held that penal interest can be
charged only once for a period of default, and further interest, whether
simple, compound, or penal, cannot be levied upon it. The relevant
observations are replicated herein:
"38. However "penal interest" has to be distinguished from
"interest". Penal interest is an extraordinary liability
incurred by a debtor on account of his being a wrongdoer by
having committed the wrong of not making the payment
when it should have been made, in favour of the person
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wronged and it is neither related with nor limited to the
damages suffered. Thus, while liability to pay interest is
founded on the doctrine of compensation, penal interest is a
penalty founded on the doctrine of penal action. Penal
interest can be charged only once for one period of default and
therefore cannot be permitted to be capitalised."
"55. (1) Though interest can be capitalised on the analogy
that the interest falling due on the accrued date and
remaining unpaid, partakes the character of amount
advanced on that date, yet penal interest, which is charged by
way of penalty for non-payment, cannot be capitalised.
Further interest i.e. interest on interest, whether simple,
compound or penal, cannot be claimed on the amount of penal
interest. Penal interest cannot be capitalised. It will be
opposed to public policy."
11. The aforementioned principles find clear consonance in regulatory
directives issued by the Reserve Bank of India, particularly its Circular
dated 18.08.2023. The said Circular mandates that any penalty charged
for non-compliance with material terms and conditions of the loan
agreement shall be treated as a "penal charge" and not levied in the
form of additional interest. Crucially, it prohibits the capitalisation of
such penal charges, stating that no further interest shall be computed
thereon. The relevant portion is replicated hereinunder:
"Penalty, if charged, for non-compliance of material terms
and conditions of the loan contract by the borrower shall be
treated as 'penal charges' and shall not be levied in the form
of 'penal interest' that is added to the rate of interest charged
on the advances.
There shall be no capitalisation of penal charges, i.e., no
further interest computed on such charges. However, this
will not affect the normal procedures for compounding of
interest in the loan account."
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12. Thus, it is clear that both judicial pronouncements and regulatory
directives unequivocally prohibit the capitalisation of penal charges,
reinforcing the principle that such sums are to be treated distinctly and
must not be subjected to interest accrual.
13. As regards the classification of loan accounts as Non-Performing Assets,
the governing regime is encapsulated in the Reserve Bank of India's
Master Circular on Income Recognition, Asset Classification,
Provisioning & Other Related Matters dated 1st July 2009.
14. In terms of Clause 2.1.2 of the Reserve Bank of India's Master Circular
on Income Recognition, Asset Classification, Provisioning and Other
Related Matters dated 1st July 2009, a Non-Performing Asset is a loan
or an advance where the account remains "out of order" for a period of
more than 90 days in respect of an Overdraft or Cash Credit account.
An account is treated as "out of order" if the outstanding balance
remains continuously in excess of the sanctioned limit or drawing
power. Even where the outstanding balance is within the sanctioned
limit or drawing power, the account shall be treated as "out of order" if
there are no credits continuously for 90 days, or if the credits are not
sufocient to cover the interest debited during the same period.
15. These conditions are cumulative in nature and must be objectively
established based on verifiable data. The Petitioner, relying on account
statements, has demonstrated that substantial credits were made into
the account within the ninety-day period preceding the date of
classification. The account was not continuously overdrawn during this
period, except for a single instance on 30 September 2024, which was
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promptly regularised on the following day. Moreover, as on 30
December 2024, the date on which the account was classified as a Non-
Performing Asset, the outstanding liability stood within the sanctioned
limit of fourteen crores of rupees.
16. The Respondent Bank on the other hand has not produced cogent
material to rebut these facts. Its pleadings reveal inconsistency as in its
afodavit dated 16.01.2025, it concedes that the account was "indirectly
saving" itself from being declared an NPA, while in a subsequent
afodavit dated 05.02.2025, it asserts that the account had already been
classified as an NPA. Such contradictions expose a lack of procedural
transparency and cast serious doubt on the legitimacy of the
classification.
17. Taken cumulatively, the actions of the Bank, including the unilateral
reduction of credit limits, and the unlawful capitalisation of penal
interest, reveal a pattern of opacity and a disregard for regulatory
compliance.
V. CONCLUSION:
18. In view of the foregoing, this Court is of the considered opinion that the
reduction of the Cash Credit limit from ₹14 Crores to ₹6 Crores was
procedurally flawed and, in the absence of fair notice or opportunity, is
liable to be set aside.
19. The classification of the Petitioner's account as a Non-Performing Asset
on 30.12.2024 was not supported by the facts on record and was in
contravention of Clause 2.1.2 of the RBI Master Circular dated
01.07.2009.
Location: ORISSA HIGH COURT, CUTTACK
20. Furthermore, the levy and capitalisation of penal interest were contrary
to law as laid down in Ravindra (supra) and in violation of the RBI
Circular dated 18.08.2023.
21. Accordingly, both the Writ Petitions are allowed.
22. The impugned actions of the Opposite Party Bank are hereby set aside.
The classification of the Petitioner's account as NPA dated 30.12.2024 is
declared illegal and is quashed. The Bank is further directed to reverse
any capitalised penal interest and to ensure compliance with the RBI
Circular dated 18.08.2023 in letter and spirit.
23. Interim order, if any, passed earlier stands vacated.
(Dr. S.K. Panigrahi)
Judge
Orissa High Court, Cuttack,
Dated the 9th May, 2025/
