Orissa High Court
Satya Ranjan Moharana & Ors vs Chief Manager on 14 November, 2025
Author: Sanjeeb K Panigrahi
Bench: Sanjeeb K Panigrahi
Signature Not Verified
Digitally Signed
Signed by: BHABAGRAHI JHANKAR
Reason: Authentication
Location: ORISSA HIGH COURT, CUTTACK
Date: 20-Nov-2025 13:50:39
IN THE HIGH COURT OF ORISSA AT CUTTACK
W.P.(C) No.9483 of 2025
(In the matter of a petition under Articles 226 and 227 of the
Constitution of India, 1950).
Satya Ranjan Moharana & Ors. .... Petitioner(s)
-versus-
Chief Manager, Bank of India, Retail .... Opposite Party(s)
Banking Centre, Zonal Office,
Bhubaneswar & Ors.
Advocates appeared in the case through Hybrid Mode:
For Petitioner (s) : Mr. Debendra Kumar Sahoo (1), Adv.
-versus-
For Opp. Party(s) : Mr. Gurudutta Kar, Adv.
CORAM:
DR. JUSTICE SANJEEB K PANIGRAHI
DATES OF HEARING:- 06.11.2025
DATE OF JUDGMENT:- 14.11.2025
Dr. Sanjeeb K Panigrahi, J.
1. The Petitioners in the present Writ Petition assail the letter dated
22.11.2024 issued by the Branch Manager, Bank of India, Tangi Branch,
alleging that the housing loans sanctioned at a floating interest rate of
8.70% for residential use have been utilised for running a hotel and
restaurant, and proposing to levy commercial interest at 3.5% above
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RBLR with retrospective effect. The petitioners contend that the said
action is arbitrary, illegal and unsustainable.
I. FACTUAL MATRIX OF THE CASE:
2. Succinctly put, the facts of the case are as follows:
(i) Petitioner No.1 is the borrower and petitioner Nos.2 and 3 are the
co-borrowers in respect of the loan transactions in question. The
petitioners applied for a loan of Rs.50,00,000/- on 14.02.2018 and
another loan of Rs.16,34,000/- under the 'Star Home Loan Scheme' of
the Opposite Party Bank for construction on the first and second
floors of the existing ground floor structure standing over Khata
No.223, Plot No.693, Area Ac.0.08 dec., situated in Village Kotasahi
under Kotasahi Gram Panchayat.
(ii) As part of the documentation process, the petitioners submitted an
approved building plan dated 21.03.2018 and two no-objection
certificates dated 08.05.2018 issued by the Sarpanch, Kotasahi Gram
Panchayat. All relevant documents were accepted by the Bank at the
time of sanction.
(iii) After scrutinising the documents submitted by the petitioners,
the Opposite Party Bank, vide sanction letter dated 23.07.2018,
sanctioned the loan in their favour. As per the sanction terms, the
loan was repayable in 300 EMIs of Rs.40,938/- each, commencing
seven months after the first disbursement, and carried a floating rate
of interest of 8.70%.
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(iv) The petitioners were issued a letter dated 22.11.2024 by the
Branch Manager, Bank of India, Tangi Branch, alleging that during
Branch Audit it was observed that the building was being used for
commercial purposes over the mortgaged property. The letter
further stated that such use was contrary to the terms of the
sanctioned housing loan and that, in terms of Bank guidelines,
commercial interest at 3.50% above RBLR would be charged
retrospectively from the inception of the loan.
(v) Having no other efficacious alternative remedy against the
impugned communication dated 22.11.2024, the petitioners have
approached this Court in its extraordinary writ jurisdiction, alleging
that the demand for retrospective levy of commercial interest is
arbitrary and unsustainable.
(vi) During the pendency of the present writ petition, the Opposite
Party Bank issued notices under Sections 13(2) and 13(4) of the
SARFAESI Act. The petitioners have challenged the said measures
in W.P.(C) No.24535 of 2025, which is stated to be pending
adjudication before the Division Bench.
II. PETITIONERS' SUBMISSIONS:
3. Learned counsel for the Petitioners earnestly made the following
submissions in support of his contentions.
(i) The petitioners submitted that the letter dated 22.11.2024 issued by
the Branch Manager, Bank of India, Tangi Branch, proposing to levy
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commercial interest at 3.50% above RBLR with retrospective effect,
is illegal, arbitrary and unsustainable, and is liable to be quashed.
(ii) The petitioners further submitted that the impugned letter has been
issued without affording them any notice or opportunity to show
cause, and such unilateral reclassification of the loan account and
enhancement of interest is violative of the principles of natural
justice.
(iii) The petitioners submitted that the Branch of Bank of India, Tangi
is situated on the adjacent plot of land, and the Bank authorities had
been carrying out site inspections from time to time while
disbursing the loan amounts in phases for construction on the first
and second floors of the building.
(iv) The petitioners further submitted that all documents had been
duly verified and the loan amounts were released after periodical
spot inspections conducted by the Bank. Therefore, after more than
six years of sanction and continuous repayment of instalments, the
sudden proposal to levy commercial interest on the ground of
alleged commercial use is arbitrary and unsustainable. The Bank
cannot unilaterally vary the terms of a concluded loan contract by
retrospectively reclassifying the account and demanding commercial
rate of interest.
(v) The petitioners further stated that the Opposite Party Bank has
relied on an affidavit-cum-undertaking, which appears to have been
prepared on 29.03.2019, i.e., subsequent to the sanction order. The
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petitioners state that, at the time of sanction, their signatures were
taken on several blank documents, and the said affidavit-cum-
undertaking is now being relied upon in connection with the
additional loan amount of Rs.16,34,509/-, without the relevant
particulars having been filled in at the time of signing.
(vi) The petitioners submitted that it is well settled that the rate of
interest cannot be enhanced merely on the basis of an audit report.
An audit report, at best, points out discrepancies or issues of non-
compliance such as interest calculation errors, however, it cannot
override statutory provisions or alter the terms of a concluded
contract between the parties.
III. SUBMISSIONS OF THE OPPOSITE PARTIES:
4. Per contra, the learned counsel for the Opposite Parties earnestly made
the following submissions in support of his contentions:
(i) The present writ petition discloses no sustainable cause of action, as
the action of the Opposite Party Bank in proposing to charge
commercial rate of interest is lawful, justified, and in accordance
with the applicable law and RBI guidelines governing commercial
lending.
(ii) The writ petition is liable to be dismissed in limine, as it has been
filed on the basis of documents which were never furnished to the
Bank at the time of availing the loan. It is further contended that
certain genuine documents forming part of the loan record have
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been suppressed, and reliance has been placed on irrelevant
materials.
(iii) The petitioners availed two term loans under the Bank's "Star
Home Loan Scheme" for construction of a residential house. Both
loans were sanctioned on 23.07.2018, one for Rs.50,00,000/- and
another for Rs.16,34,000/-, with repayment stipulated in 300 EMIs.
The loan amounts were disbursed in phases for the said residential
construction.
(iv) The sanction letter records that the loans were sanctioned under
the "Star Home Loan Scheme" for construction of a residential
house, carrying interest at the rate of 8.70 percent per annum. The
loan application also contains an undertaking by the borrower that
the loan amount would be utilised exclusively for the sanctioned
purpose, failing which the Bank would be entitled to recall the
advance and levy penal or additional interest.
(v) The approved plan originally submitted before the Gram Panchayat
indicated the construction to be residential. It is contended that the
copy enclosed with the writ petition is only a photocopy extract and
does not contain the portion showing the residential nature of the
construction, whereas the complete plan bears such a remark.
(vi) The no-objection certificate filed with the writ petition is stated to
be different from the certificate submitted before the Bank at the
time of execution of the loan documents, the latter indicating
residential use.
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(vii) Petitioner No.1 had executed an affidavit-cum-undertaking
affirming that the loan amounts would be utilised exclusively for
construction of a residential house.
(viii) During the course of internal audit, it was found that the
premises for which the home loans had been sanctioned were being
used for commercial purposes as a hotel and restaurant. On the basis
of this audit finding, the Bank issued the letter dated 22.11.2024
titled "Non-compliance of sanction terms in Housing Loan,"
intimating that commercial rate of interest at 3.5 percent over RBLR
would be charged from inception for both loan accounts.
(ix) The policy underlying the housing schemes of the Government of
India is to ensure affordable housing by extending concessional
rates of interest only for loans utilised for residential purposes. Such
concessional rates are not applicable where the premises are used
for commercial activities.
(x) In view of the above, the Bank asserts that its action is strictly in
accordance with RBI guidelines and the instructions issued by its
higher authorities pursuant to policy decisions of the Central
Government relating to housing finance. It is therefore prayed that
the writ petition be dismissed with costs.
IV. EXAMINATION OF THE LEGAL MATRIX:
5. Heard learned counsel for the parties and perused the material on
record.
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6. The scope of the present writ petition is limited. This Court is not
concerned with the validity of the measures initiated under the
SARFAESI Act, which are the subject of W.P.(C) No. 24535 of 2025
before the Division Bench. The only issue that arises for consideration
is whether the Opposite Party Bank, by its letter dated 22.11.2024, could
unilaterally reclassify the petitioners' housing loan accounts as
commercial loans and impose commercial interest retrospectively from
the inception of the loan on the allegation that the premises were being
used as a hotel and restaurant.
7. The petitioners availed loans under the Opposite Party Bank's "Star
Home Loan Scheme" at a floating rate of 8.70 percent. The home loan
application contains a declaration enabling the Bank, in the event of
misuse, to recall the advance, levy penal or additional interest, and take
steps deemed fit. While this clause authorises the Bank to act upon
discovering that the loan has not been utilised for the sanctioned
purpose, it does not authorise retrospective alteration of the nature of
the loan or retrospective repricing of instalments already paid and
accepted.
8. The relevant extract of the declaration reads as follows:
"v. In case at any point of time hereinafter it transpires
that information provided is found to be incorrect/false
and / or that it is observed that the loan to be availed by
me / us is not utilised for the purpose it is lent, the bank
shall be at liberty to recall the advance forthwith
irrespective of the contracted terms of loan and charge
me/us penal/additional Interest or take any steps that may
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be deemed fit by the Bank. I/we shall repay the entire loan
with additional / penal interest and other charges, if any
forthwith;"
9. Contractual remedies ordinarily operate prospectively unless the
contract expressly provides otherwise. A fundamental term such as the
rate of interest cannot be altered for past periods unless expressly
authorised. General language such as "take steps as deemed fit" cannot
be expanded to permit retrospective reclassification of the loan or
retrospective repricing of instalments already paid and accepted.
10. Even assuming that the petitioners used the premises for a purpose
other than the sanctioned residential use, the measure adopted by the
Bank operates in the nature of a stipulation for breach and attracts
Section 74 of the Contract Act.
11. Under Section 74 of the Contract Act, where a contract has been broken
and a sum is named in the contract as the amount to be paid in case of
such breach or the contract contains any other stipulation by way of
penalty, the party complaining of the breach is entitled, whether or not
actual damage is proved, only to reasonable compensation not
exceeding the amount so named or, as the case may be, the penalty
stipulated for. The provision does not permit the enforcement of a sum
or consequence beyond what would constitute reasonable
compensation.
12. Applying these principles, retrospective enhancement of interest from
the date of sanction, based solely on a later allegation of misuse, would
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amount to reopening settled transactions spanning more than six years.
In the absence of an express contractual provision permitting such
retrospective adjustment, the action taken by the Bank cannot be
sustained.
13. As a public sector bank, the Opposite Party is required to adhere to
standards of fairness in its decision-making. A decision imposing
significant civil consequences, including reclassification of a loan and
creation of a retrospective financial liability, cannot be taken without
notice and an opportunity to respond. The absence of such prior notice
renders the action unsustainable.
14. Further, the petitioners contend that the Bank had knowledge of the
nature of the construction from inception and that disbursements were
made after inspections. Conversely, the Bank disputes these assertions
and maintains that the facility was sanctioned as a housing loan based
on residential documents. It is unnecessary to conclusively determine
these disputed factual issues in the present proceedings. They may be
examined, if required, in appropriate proceedings, including the
pending SARFAESI matter.
15. For the purpose of the present writ petition, even if the matter is
viewed in the manner most favourable to the Bank, namely that the
loan was sanctioned for residential use and the premises were
subsequently utilised commercially, the course adopted by the Bank
cannot be justified. The Bank treated the account as a housing loan for
more than six years, accepted EMIs at the contracted rate, conducted
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periodic inspections and raised no objection until November 2024.
Having consistently acted on the basis that the account was a housing
loan, the Bank cannot now retrospectively assert that the facility was
commercial from inception.
16. The retrospective application of commercial interest has the effect of
reopening instalments long since paid and accepted at the agreed rate.
Such a course is beyond the contemplation of the contract and cannot
be supported by a general stipulation permitting action in the event of
breach.
V. CONCLUSION:
17. In view of the foregoing discussion, the Bank's action in imposing
commercial rate of interest retrospectively from the inception of the
loan is contrary to contract, disproportionate in terms of Section 74 of
the Contract Act and procedurally unfair. The letter dated 22.11.2024 is
quashed to the extent it seeks to reclassify the loan as commercial with
effect from the date of original sanction and to demand differential
interest for any period prior to the date of the impugned
communication.
18. As a consequence of the quashing of the retrospective re-pricing, the
loan accounts shall stand restored to the contracted housing-loan rate
for the period up to 22 November 2024, and any debits or demands
raised solely on the basis of such retrospective re-pricing shall not
survive.
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19. This Court clarifies that these findings do not preclude the Bank from
taking action permissible in law if misuse is ultimately established. The
Bank is free to treat such misuse as an event of default, to recall the
loan, or to impose commercial terms prospectively, provided that any
such step is taken after due notice to the petitioners and in accordance
with applicable guidelines. The Bank is not permitted to alter the
character of the facility with retrospective effect or revise past
instalments accordingly.
20. The Writ Petition is, accordingly, allowed to the above extent.
21. Interim order, if any, passed earlier stands vacated.
(Dr. Sanjeeb K Panigrahi)
Judge
Orissa High Court, Cuttack,
Dated the 14th Nov., 2025
