[Cites 20, Cited by 0]
Orissa High Court
Maa Tarini Poultries Pvt. Ltd vs Indian Bank on 29 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: 04-Dec-2025 18:50:39
IN THE HIGH COURT OF ORISSA AT CUTTACK
W.P.(C) No.23022 of 2025
(In the matter of a petition under Articles 226 and 227 of the
Constitution of India, 1950).
Maa Tarini Poultries Pvt. Ltd., .... Petitioner (s)
Ganjam
-versus-
Indian Bank, Main Branch, Berhampur .... Opposite Party(s)
& Ors.
Advocates appeared in the case through Hybrid Mode:
For Petitioner (s) : Mr. Meru Sagar Samantaray, Adv.
Mr. Debasish Samal, Adv.
-versus-
For Opp. Party(s) : Mr. Tuna Sahu, Adv. (for Indian Bank),
Mr. R.Roy, Adv. (for RBI).
CORAM:
DR. JUSTICE SANJEEB K PANIGRAHI
DATES OF HEARING:- 19.11.2025
DATE OF JUDGMENT:- 29.11.2025
Dr. Sanjeeb K Panigrahi, J.
1. When discretion hardens into exaction, it ceases to be banking and
becomes expropriation. The levy of pre-payment or foreclosure charges
on floating-rate credit facilities, prohibited as it is by the RBI's binding
directives, exemplifies such an impermissible transformation. A bank
cannot convert a borrower's right to mobility into a chargeable
Location: ORISSA HIGH COURT, CUTTACK
commodity. Any such attempt, as in the present case, stands
condemned by statute, policy, and public interest alike. The instant
case narrates the ordeal of the petitioner while dealing with the pre-
payment's charges.
2. The Petitioner has invoked the writ jurisdiction of this Court, assailing
the arbitrary and unsustainable demand raised by the Respondent-
Bank towards foreclosure charges in respect of Item Loan Account No.
7166340164 and Cash Credit Account No. 7303572317, both availed by
the Petitioner in its capacity as an MSME unit. The Petitioner contends
that the impugned demand is devoid of contractual authority and
contrary to the regulatory framework governing MSME lending,
thereby warranting the Court's intervention. It is the specific case of the
Petitioner that the levy of foreclosure charges is dehors the terms of the
loan agreement, inconsistent with the directions issued by the Reserve
Bank of India, and constitutes an instance of manifest arbitrariness. The
Petitioner asserts that, having fully discharged all outstanding dues, no
lawful basis exists for the Respondent-Bank to insist on foreclosure
charges or to retain the Petitioner's secured documents. In these
circumstances, the Petitioner prays for issuance of an appropriate writ,
order, or direction directing the Respondent-Bank to forthwith release
the original title deeds, property documents, and all collateral securities
deposited by the Petitioner at the time of sanction of the aforesaid loan,
the Petitioner's loan liabilities having admittedly been liquidated in
full.
Location: ORISSA HIGH COURT, CUTTACK
I. FACTUAL MATRIX OF THE CASE:
3. The brief facts of the case are as follows:
(i) The Petitioner is an MSME, Maa Tarini Poultries Pvt. Ltd., bearing
Registration No. UDYAM-OD-11-0003310, had, with the objective of
establishing an agro-based industrial unit, submitted an application
before the Indian Bank, Main Branch, Berhampur, seeking sanction
of a term loan of ₹1.80 Crores under the MSME Scheme.
(ii) Pursuant to the said application, the Respondent-Bank sanctioned a
loan of ₹1.80 Crores in February 2022 under the applicable MSME
lending guidelines, subject to creation of a valid mortgage over the
Petitioner's immovable property and furnishing of other collateral
securities. Upon completion of the requisite documentation and
security formalities, the sanctioned amount was duly disbursed in
favour of the Petitioner.
(iii) In terms of the loan agreement, the Petitioner regularly serviced
the loan by making timely payments towards both principal and
interest. However, following the sanction of the loan, the Petitioner
encountered persistent harassment at the hands of Opposite Party
No.1/bank. It is specifically alleged that the Bank compelled the
Petitioner to procure an SBI Life Personal Insurance policy valued at
₹1.53 lakh per annum. When the Managing Director of the Petitioner
declined to accede to this demand, Opposite Party No.1 allegedly
proceeded to dishonour cheques issued by the Petitioner towards
Location: ORISSA HIGH COURT, CUTTACK
repayment of instalments during the year 2023 and also obstructed
the Petitioner's NEFT transactions.
(iv) On 22.05.2023, the Petitioner's poultry unit suffered extensive and
severe damage owing to a Kala Baisakhi storm. The Petitioner
immediately approached Opposite Party No.1 seeking initiation of
the requisite insurance claim process. However, no effective steps
were taken by the Bank or its insurance partner. It was only after
intervention by this Court after more than a year, the Bank and the
insurer undertook the necessary assessment. This inordinate delay
in processing the insurance claim caused grave financial strain and
operational hardship to the Petitioner's enterprise.
(v) Subsequently, the Petitioner approached HDFC Bank, Berhampur,
for takeover of its existing loan facilities from Opposite Party No.1.
Upon clearing all instalments outstanding with Opposite Party No.1,
the Petitioner's loan accounts were duly taken over by HDFC Bank
on 26.05.2024 and the Petitioner discharged the entire outstanding
dues in full.
(vi) Despite the complete liquidation of dues and formal takeover of
the loan accounts by HDFC Bank, Opposite Party No.1 thereafter
raised a demand for foreclosure charges at the rate of 4%, ostensibly
towards loan closure. The said demand is contrary to the extant RBI
guidelines governing MSME credit facilities, which expressly
prohibit the imposition of foreclosure or prepayment penalties in the
case of MSME loans.
Location: ORISSA HIGH COURT, CUTTACK
(vii) Despite repeated and bona fide requests by the Petitioner seeking
waiver of the 4% foreclosure charges and for return of its original
title deeds, property documents, and collateral securities, Opposite
Party No.1 has refused and neglected to take any action or even
respond to the Petitioner's communication
(viii) Furthermore, the Petitioner has fully discharged all outstanding
loan dues, but the Opposite Party No.1 continues to unlawfully
withhold the mortgaged properties and original documents, instead
of returning the same to the Petitioner as mandated under law and
standard banking procedure.
(ix) Being aggrieved, the Petitioner personally visited the office of the
Reserve Bank of India on 11.07.2025 to meet the Ombudsman and to
ventilate the grievance in person. However, the officials informed
the Petitioner that the mechanism under the RBI Ombudsman
Scheme does not provide for personal hearings. Consequently, the
Petitioner's grievance was neither heard nor was any substantive
progress made on the complaint
4. Aggrieved by the aforesaid arbitrary actions and persistent inactions on
the part of Opposite Party No.1 bank including the unwarranted levy
of foreclosure charges, the unlawful withholding of the Petitioner's title
deeds and collateral documents despite full repayment and the
prolonged delay in facilitating the insurance claim for which the
Petitioner has been left remediless before the banking authorities. With
no efficacious statutory or departmental remedy available, and faced
Location: ORISSA HIGH COURT, CUTTACK
with continuing prejudice to its proprietary and commercial rights, the
Petitioner has been compelled to invoke the extraordinary jurisdiction
of this Court by filing the present Writ Petition
II. SUBMISSIONS ON BEHALF OF THE PETITIONER:
5. The learned counsel for the Petitioner Mr. Meru Sagar Samantaray
respectfully and earnestly made the following submissions in
support of his contentions:
i. The Petitioner is a registered MSME entity which, with the bona fide
intention of establishing an agro-based enterprise, approached the
Indian Bank in September 2020 seeking financial assistance under
the MSME Scheme. The Petitioner's request for credit support was
made in furtherance of the national objective of promoting micro
and small enterprises, as reflected in the statutory framework of the
MSMED Act, 2006 and the allied RBI directives intended to ensure
timely and affordable credit to MSMEs.
ii. Pursuant to the aforesaid application, the Respondent Bank
sanctioned a loan in February 2022 and issued a sanction ticket
dated 09.02.2022, approving a total credit limit of ₹1.80 Crores under
the applicable MSME guidelines. The sanction was accorded on the
condition of creation of an equitable mortgage over the Petitioner's
immovable properties and furnishing of collateral securities. Upon
completion of the requisite security formalities, the sanctioned
amount was duly disbursed to the Petitioner through the following
two loan accounts:
Location: ORISSA HIGH COURT, CUTTACK
a. Term Loan Account No. 7166340164 -- ₹1.45 Crore
b. Cash Credit Account No. 7303572317 -- ₹35 Lakhs
iii. The Petitioner states that it has, at all material times, complied with
the contractual terms governing the loan facilities and regularly
discharged its repayment obligations towards principal and interest.
However, the Petitioner was soon subjected to a series of
unwarranted, coercive, and mala fide acts on the part of Opposite
Party No.1, Indian Bank. It is specifically alleged that officials of
Opposite Party No.1 exerted undue pressure upon the Managing
Director of the Petitioner-MSME to compulsorily purchase a SBI Life
Personal Insurance policy valued at ₹1.53 Lakhs per annum, thereby
acting in effect as intermediaries or agents of the insurer which is
impermissible under banking norms and violative of RBI's Fair
Practices Code. Upon the Petitioner's refusal to succumb to such
coercive solicitation, Opposite Party No.1 allegedly proceeded, with
malice and retribution, to dishonour cheques issued by the
Petitioner towards repayment of instalments during 2023, and
further blocked NEFT transactions, thereby adversely affecting the
Petitioner's business operations. Such conduct, apart from being
arbitrary and unreasonable, constitutes an abuse of banking
authority.
iv. The Petitioner further submits that it suffered severe storm damage
to its poultry farm on 22.05.2023 due to a Kala Baisakhi storm.
Immediately upon the occurrence of the natural calamity, the
Location: ORISSA HIGH COURT, CUTTACK
Petitioner approached Opposite Party No.1 seeking initiation of the
insurance claim process. Despite repeated requests, Opposite Party
No.1 failed to take any meaningful steps for over a year. It was only
upon intervention of this Court in connected proceedings that the
Bank and its insurance partner undertook the requisite assessment.
By then, the Petitioner had already been compelled to expend
substantial sums for reconstruction of the damaged farm. The
inordinate delay in facilitating the insurance claim which is an
obligation ancillary to the loan transaction that inflicted serious
financial hardship and consequential operational losses upon the
Petitioner. Such an apathetic conduct by the Bank strikes at the heart
of its fiduciary like duties towards MSME borrowers and violates
the principles of fairness, responsiveness, and transparency
governing public sector banks.
v. Owing to the cumulative difficulties created by Opposite Party No.1,
the Petitioner approached HDFC Bank, Berhampur, seeking
takeover of its existing loan facilities. After clearing all outstanding
dues payable to Opposite Party No.1, the Petitioner's loan accounts
were formally taken over by HDFC Bank on 26.05.2024. The
Petitioner discharged its obligations by tendering the following
amount of cheques on the following dates:
(a) 22.05.2024 -- ₹35 Lakhs
(b) 26.05.2024 -- ₹1.10 Crore
Location: ORISSA HIGH COURT, CUTTACK
Thus, the Petitioner fully and finally extinguished the loan liability
owed to Opposite Party No.1.
vi. However, despite the complete repayment and takeover, Opposite
Party No.1 proceeded to raise a demand for foreclosure charges at
the rate of 4% of the outstanding amount. The imposition of such
foreclosure charges is patently unlawful and ex facie contrary to the
extant RBI guidelines, which categorically prohibit banks from
levying pre-payment or foreclosure charges on MSME loans under
floating-rate structures1.These binding directives are aimed at
ensuring credit mobility, reducing financial burden on MSMEs, and
preventing anti-competitive practices by banking institutions. The
insistence of Indian Bank on levying foreclosure charges, in defiance
of a clear regulatory mandate, amounts to an arbitrary and
unreasonable exercise of power. It also undermines the legislative
and policy intent underlying MSME protection, rendering the action
susceptible to judicial review.
vii. He further submits that the Supreme Court of India in Central Bank
of India v. Ravindra2 dictates the circular issued by the Reserve
bank of India is binding on the commercial banks in India. Further,
RBI Circular DBR.No. Dir.BC.07/13.03.00/2012-13 dated 01.07.2014 which extends the non-
levy mandate to all floating rate loans to MSMEs, including:
o Working capital
o Term loans
o Credit facilities
(2002) 1 SCC 367
Location: ORISSA HIGH COURT, CUTTACK
in ICICI Bank v. Official Liquidator3, it has been held that
contractual terms cannot override directives of the RBI. Meaning
thereby, if RBI prohibits foreclosure charges, no contract can validate
them applying this principle, any foreclosure charge levied is
contrary to RBI's prohibition. Therefore, charging "processing fee on
prepayment" or "switch-over charge" are nothing but disguised
charges as foreclosure charges which is illegal. This action of the
bank brazenly violates statutory RBI guidelines, attracting the
doctrine of public law obligations.
viii. Despite repeated written and oral representations made by the
Petitioner seeking waiver of the illegal foreclosure charges and
requesting the return of the original title deeds and collateral
documents after the complete liquidation of all outstanding dues,
the Opposite Party No.1/Bank has refused to take any action. The
continued inaction of the Bank and its deliberate retention of the
Petitioner's documents is wholly unjustified, arbitrary, and in
derogation of settled banking practices that require immediate
release of securities upon repayment.
ix. Notwithstanding the Petitioner's full repayment of dues, Opposite
Party No.1/Bank continues to unlawfully withhold the following
mortgaged properties/documents:
a. A residential property situated at Berhampur, valued at
approximately ₹2 Crores;
3 (2010)10 SCC 1
Location: ORISSA HIGH COURT, CUTTACK
b. 5.9 acres of Garabari land in Dimiria Mouza near NH-16,
which is critical to the Petitioner's operational
infrastructure.
Such illegal retention of securities amounts to an infringement of
the Petitioner's proprietary rights under Article 300-A of the
Constitution and gives rise to a continuing cause of action
warranting exercise of writ jurisdiction by this Court.
(ix) Aggrieved thereby, the Petitioner personally visited the Reserve
Bank of India on 11.07.2025 with the intention of presenting the
grievance before the Ombudsman. However, the Petitioner was
informed that the Ombudsman Scheme does not provide for
personal hearings. Consequently, the Petitioner's grievance was
neither heard nor redressed, and the status of the complaint has
continued to remain stagnant as "waiting for Bank's reply" for over
a month. This failure of internal grievance-redressal mechanism has
left the Petitioner remediless, thereby necessitating the present
invocation of the extraordinary writ jurisdiction of this Court.
III. SUBMISSIONS ON BEHALF OF THE OPPOSITE PARTIES:
6. Learned counsel for the Opposite Parties Mr. Tuna Sahu contended
that the present Writ Petition is not maintainable before this Court as to
be rejected in limine.
i. The Opposite Parties submitted, at the outset, that the Petitioner has
not approached this Court with clean hands and have attempted to
Location: ORISSA HIGH COURT, CUTTACK
mislead the Court by suppressing material facts and by presenting a
distorted and incorrect factual narrative.
ii. It is submitted that on 28.12.2021, the Petitioner approached the
Indian Bank, Berhampur Branch seeking two credit facilities--
namely, an Agricultural Term Loan (AGMTL) and an Open Cash
Credit (OCC) facility, for the purposes of constructing its industrial
unit and purchasing machinery for its commercial operations.
Consequent thereto, the Bank, upon due appraisal, sanctioned the
following credit facilities on 09.02.2022:
(a) AGMTL (Agricultural Term Loan) - ₹145 Lakhs
(b) OCC (Open Cash Credit) - ₹35 Lakhs
iii. The Opposite Parties further submitted that the RBI circulars relied
upon by the Petitioner pertain exclusively to floating-rate home
loans and loans extended to individual borrowers. The present
facilities were availed for commercial/business purposes and not as
retail loans to individuals. Hence, the aforesaid circulars have no
application to the present case, and the Petitioner's reliance thereon
is wholly misconceived.
iv. It is further submitted that after availing and fully utilising the
sanctioned loan facilities for profit-oriented business activities, the
Petitioner failed to service the interest obligations, leading to
accumulation of substantial overdue amounts in the loan account.
Despite repeated notices, letters, and reminders issued by the Bank,
the Petitioner persistently failed to furnish the requisite financial
Location: ORISSA HIGH COURT, CUTTACK
documents necessary for renewal of the OCC account, thereby
violating contractual obligations.
v. On 05.03.2024, the Bank issued a detailed communication specifying
the documents required from the Petitioner and clearly intimating
that non-submission or delayed submission thereof would attract an
Additional Rate of Interest (ARI) as per the sanction terms. Further
letters dated 16.04.2025 and 24.05.2025 were issued, calling upon the
Petitioner to regularise the overdue amounts.
vi. The Opposite Parties contended that apprehending that the account
may be classified as sub-standard under RBI's asset classification
norms due to persistent non-compliance and absence of mandated
documentation, the Petitioner, without rectifying the deficiencies,
sought to have the credit facilities taken over by HDFC Bank.
vii. It is further submitted that the Petitioner has committed multiple
breaches under the Term Loan Agreement, the OCC Agreement,
and the Agreement of Hypothecation relating to the agricultural
loan. Having unequivocally consented to abide by all terms and
conditions of sanction including the levy of applicable service
charges, the Petitioner cannot now turn around and challenge the
consequences flowing from such contractual breaches.
viii. The Opposite Parties further submitted that Clause 10 of the post-
disbursement conditions of the Sanction Letter dated 09.02.2022
expressly provides that, in the event of a takeover, service charges at
the rate of 4% of the total outstanding or the drawing limit,
Location: ORISSA HIGH COURT, CUTTACK
whichever is higher, shall be leviable in respect of both the Term
Loan and OCC facilities. The Petitioner, having accepted these terms
by affixing his signature and seal, is estopped from disputing the
same at this belated stage.
ix. It is submitted that, in line with internal circulars and revised norms,
the Bank issued a communication dated 30.07.2025 informing the
Petitioner that although the sanction terms prescribed service
charges at 4% of the outstanding or drawing limit, the applicable
rate had since been revised to 2%, which was being extended to the
Petitioner as a measure of fairness and consistency.
x. Lastly, it is submitted that the Petitioner had earlier raised an
identical grievance before the Banking Ombudsman under the RBI
Integrated Ombudsman Scheme. After considering the submissions
and material on record, the said complaint was rejected and closed
on 31.07.2025. The Petitioner, having already invoked and exhausted
the statutory grievance redressal mechanism, cannot re-litigate the
same issue before this Hon'ble Court.
IV. COURT'S REASONING AND ANALYSIS:
7. Heard Learned Counsel for parties and perused the documents placed
before this Court.
8. This Writ Petition challenges the conduct of Opposite Party No.1
(Indian Bank) in relation to loans sanctioned to the Petitioner, namely,
(a) alleged coercion to procure an insurance policy; (b)
dishonour/obstruction of payment instruments and banking
Location: ORISSA HIGH COURT, CUTTACK
transactions; (c) prolonged inaction and unreasonable delay in
processing an insurance claim arising out of a natural calamity; (d)
insistence on a 4% "foreclosure / takeover" charge despite full
repayment and takeover by HDFC Bank; and (e) continued retention of
original title deeds and collateral documents after the alleged
repayment/closure. The Petitioner seeks, inter alia, quashing of the
Bank's demand for foreclosure charges and immediate return of
original documents.
9. Banking contracts operate within a dense network of public regulatory
norms. When a regulatory authority, for reasons of public policy,
prescribes protections for a class of borrowers (here, MSMEs),
contractual terms inconsistent with such prescriptions cannot be
enforced. This is not to erode the contractual autonomy but to affirm
that autonomy exists only within the bounds of law. In light of the
foregoing facts, the Court observes that the issue consideration pertains
to the interpretation of the Loan Agreement vis-à-vis the applicable RBI
guidelines. Reliance is placed upon ABL International Ltd v. Export
Credit Guarantee Corporation of India Ltd.4, wherein the Supreme
Court has authoritatively held that, in appropriate cases, the writ court
is vested with the jurisdiction to entertain a petition even where certain
factual disputes arise, and that questions relating to the interpretation
or construction of documents may be examined and adjudicated upon
in exercise of writ jurisdiction, if the attendant facts so permit.
(2004) 3 SCC 553
Location: ORISSA HIGH COURT, CUTTACK
A. ANALYSISAND APPLICATION OF THE STATUTORY
FRAMEWORK:
10.In the present case, the Petitioner is a registered MSME engaged in the
poultry sector under the activity head pertaining to the
manufacturing/raising of poultry and production of eggs, as classified
under the relevant National Industry Classification code(s). Section 10
of the Micro, Small and Medium Enterprises Development Act, 2006
enjoins the formulation of progressive credit policies for MSMEs, in
consonance with the guidelines issued by the RBI, so as to ensure a
timely and unhindered flow of credit to such enterprises. The statutory
framework, therefore, reinforces the authority of the RBI to regulate
and prohibit the levy of exploitative charges, including foreclosure
penalties, in respect of MSME loans.
11.The Banking Codes and Standard Board of India (BCSBI) has
formulated a Code of Bank's Commitment to Micro and Small
Enterprises, which prescribes the minimum standards of fair and
transparent banking practices for banks to be adhered to by banks
while dealing with Micro and Small Enterprises (MSEs) as defied under
MSMED Act, 2006.
12.The substance of a charge, not its label, determines its legality.
Disguised prepayment fees undermine the regulatory objective of
enabling credit mobility for small enterprises. Reference may also be
had to the RBI Circular dated 02.08.2019 titled "Levy of Foreclosure
Charges/Pre-Payment Penalty on Floating Rate Term Loans", wherein it has
been clarified that banks shall not levy foreclosure charges or pre-
Location: ORISSA HIGH COURT, CUTTACK
payment penalties on floating rate term loans sanctioned to individual
borrowers for purposes other than business.
13.The Bank's subsequent internal communication lowering the rate to 2%
(dated 30.07.2025) cannot cure the original illegality if the levy itself is
contrary to mandatory regulatory prescription. The demand of 4% or
any similar charge which in substance operates as a
foreclosure/prepayment/takeover fee on MSME credit, where
regulatory prescription forbids such levy, is unlawful, arbitrary and
must be quashed.
B. RBI GUIDELINES AND REGULATORY DIRECTIONS:
14.The RBI's regulatory framework on this subject has undergone a
calibrated evolution, commencing with the prohibitions of prepayment
penalties for individual borrowers and thereafter being progressively
extended to MSMEs with a view to advancing financial inclusion and
facilitating unhindered access to credit. These directives underscore
that foreclosure charges (also known as pre-payment penalties) ought
not be levied on floating-rate loans, as such levies do not constitute a
legitimate pre-estimate of loss to the bank but, instead, operate as a
disincentive to early repayment or loan refinancing. The underlying
intent of RBI is cultivating a borrower-centric regime, particularly for
MSMEs, which constitute a pivotal segment of the national economy
and frequently grapple with liquidity constraints.
15.The BCSBI, being a set of commitments voluntarily adopted by banks,
attains enforceability to the extent that non-compliance may be
Location: ORISSA HIGH COURT, CUTTACK
subjected to scrutiny before the Banking Ombudsman. In the present
case, the Petitioner initially approached the Indian Bank, Zonal Office
(Opp. Party No.2), but no response was forthcoming. Consequently, the
Petitioner lodged a complaint before the Reserve Bank of India on
04.07.2025, being Complaint No. N2025260030026, assailing the levy of
unlawful foreclosure charges and the withholding loan documents.
Owing to certain technical impediments faced during the filing process,
the Petitioner personally visited the office of the RBI on 11.07.2025 to
meet the ombudsman and submit the grievance in person. However,
the authorities neither afforded the Petitioner on opportunity of
hearing nor took any steps to advance the complaint, thereby leaving
the grievance unaddressed.
16.This Court is of the considered view that the Bank's insistence on
levying 4% charges and its continued withholding of the Petitioner's
documents is wholly arbitrary and falls foul of the mandate of Article
14 of the Constitution of India. It stands admitted that the Petitioner
has repaid the loan in its entirety upon takeover by HDFC Bank
through cheques dated 22.05.2025 and 26.05.2025. notwithstanding
such full repayment, Opp. Party No.1 has withheld the property
documents, thereby unjustly depriving the Petitioner of enjoyment of
her property and infringing the guarantee under Article 300A of the
Constitution of India.
17. Section 21 of the Banking Regulation Act, 1949 confers upon the RBI to
regulate the lending and credit practices of banking companies. Under
Location: ORISSA HIGH COURT, CUTTACK
Section 21(1), the RBI is empowered to formulate and determine
policies relating to advances whenever it considers such intervention
necessary or expedient in the public interest or the interest of
depositors. Section 21(3) further mandates that every banking company
shall comply with all direction issues by RBI in this regard. A Section
35A gives RBI even wider powers to intervene in banking operation.
Thus, the statutory scheme unequivocally establishes the binding
nature of RBI directives on all banking institutions.
18.While the bank-borrower relationship is essentially contractual,
commercial banks perform functions touching upon public interest
when they service citizens' access to credit. Such functions attract
duties of fairness, reasonableness and timely action and under the
regulatory bounds. The Supreme Court echoed in the Central Bank of
India v. Ravindra(supra) held that RBI's circulars on interest and
lending terms are binding and act as bench marks against excessive or
unfair practices which held in the following:
"5. The power conferred by Section 21 and 35-A of the
Banking Regulation Act, 1949 is coupled with duty to act.
Reserve Bank of India is the prime banking institution of
the country entrusted with a supervisory role over banking
and conferred with the authority of issuing binding
directions, having statutory force, in the interest of public
in general and preventing banking affairs from deterioration
and prejudice as also to secure the proper management of
any banking company generally. Reserve Bank of India is
one of the watchdogs of finance and economy of the notion.
It is, and it ought to be, aware of all relevant factors,
including credit conditions as prevailing, which would
Location: ORISSA HIGH COURT, CUTTACK
invite its policy decisions. RBI has been issuing
directions/circulars from time to time which, inter alia, deal
with the rate of interest which can be charged and the
periods at the end of which rests can be struck down,
interest calculated thereon and charged and capitalized. It
should continue to issue such directives. Its circulars shall
bind those who fall within the net of such directives. For
such transaction which ore not squarely governed by such
circulars, the RBI directives. For such transaction which are
not squarely governed by such circulars, the RBI directives
may be treated as standards for the purpose of deciding
whether the interest charged is excessive, usurious or
opposed to public policy"
C. CONTRACTUAL FRAMEWORK AND BAR ON UNFAIR TERMS:
19.It is a basic tenet of law of contract that contractual terms cannot be
read to defeat or circumvent statutory or regulatory mandates. Parties
may contract within the ambit of law, but they cannot contract out of
mandatory regulatory prescriptions. It is equally settled that a bank
while entitled to protect its commercial interests must act within the
regulatory framework and in consonance with principles of fairness
and reasonableness. This Court finds it necessary to examine the
impugned condition is unfair within the meaning of the statutory
scheme. Section 23 of the Indian Contract Act, 1872, particularly its
underlying principle as reflected in judicial interpretation, prescribes
the incorporation of terms that are unconscionable or contrary to public
policy and the contractual stipulation that are blatantly unfair or
Location: ORISSA HIGH COURT, CUTTACK
oppressive in their operation stand vitiated as being opposed to public
policy and are, therefore, void.
20.The Supreme Court in the case of LIC of India & Anr v. Consumer
Education & Research Centre & Ors5, held that
".....23. Every action of the public authority or the person
acting in public interest or any act that gives rise to public
element, should be guided by public interest. It is the
exercise of the public power or action hedged with public
element (sic that) becomes open to challenge. If it is shown
that the exercise of the power is arbitrary, unjust and
unfair, it should be no answer for the a State, its
instrumentality, public authority or person whose acts have
the insignia of public element to say that their actions are in
the field of private law. Its actions must be based on some
rational and relevant principles. It must not be guided by
irrational or irrelevant considerations. Every administrative
must be hedged by reasons."
".....47. it is, therefore, the settled law that if a contract or a
clause in a contract is found unreasonable or unfair,
irrational, one must look to the relative bargaining power of
the contracting parties. In dotted line contracts there would
be no occasions for weaker party to bargain or to assume to
have equal bargaining power. He has neither to accept or
leave the services or goods in terms of the dotted line
contract. His option would be either to accept the
unreasonable terms or forego the service for ever. With a
view to have the services of the goods, the party enters into a
contract with unreasonable or unfair terms contained
therein and he would left with no option but to sign the
contract".
1995 SCC (5) 482
Location: ORISSA HIGH COURT, CUTTACK
D. FORCLOUSRE AND PREPAYMENT LEVIES: EXAMINATION OF
THEIR ANTI-COMPETITIVE PRACTICES:
21.The issue bear direct relevance to the imposition of foreclosure and pre-
payment charges. The levy of such penalties operates as a deterrent to
borrowers who intend to repay their loans ahead of schedule or shift to
a competing lender. The consequences of this practice are the stifling of
competition in the credit market, compelling borrowers to remain tied
to a particular institution and thereby imposing an unwarranted
restriction and freedom of trade and choice of consumer.
22. In Competition Commission of India v. Steel Authority of India Ltd.6,
the Supreme Court has elucidated that the principal objectives of the
Competition Act, as discernible from its Preamble and Statement of
Objects and Reasons, are to eliminate practices having an adverse
effects on the competition, to promote and sustain competition in the
market, to protect the interest of the consumers, and to secure the
freedom of trade carried on by the participants in the market, in view
of the economic developments of the country. The Court emphasised
that the Act is intended not merely of safeguard the integrity of trade
but equally to ensure the protection of consumer interest.
23. As per the Competition Act, 2002, Section 3(1), expressly prescribes
agreements which cause or are likely to cause an appreciable adverse
effect on competition. Under Section 3(3)(b), a presumption of anti-
competitive effects arises where there is any practice resulting in
Civil Appeal No. 7779 of 2010 (Supreme Court)
Location: ORISSA HIGH COURT, CUTTACK
limitation or control in provision of services. The imposition of
prepayment or foreclosure penalties, by its very nature, operates as a
mechanism of control, curtailing consumer choice and impeding
healthy competition among banks and financial institutions.
24. A similar view has been reiterated by the Ld. NCDRC in Dr. Usha
Vaid vs. State Bank of India7, it was held that in a consumer grievance
case, it has upheld the decision of the National Consumer Grievance
Redressal Commission wherein, it was held by them that there should
be no pre-payment charge on migration of loan to another lender and
the levy of pre-payment penalty amounts to unfair and restrictive trade
practices. The State Bank of India challenged the said order till the
Supreme Court of India but the Supreme Court also did not interfere
with the said order though the issue of foreclosure of loan charges is
yet to be settled by an authoritative pronouncement of the Apex Cort.
25. In the present case, the loan was sanctioned in favour of the Petitioner
is conspicuously bereft of any covenant authorising the imposition of
pre-payment or foreclosure charges. Even assuming, arguendo and only
for the sake of academic hypothesis, that such a stipulation could
somehow be conjured out of the sanction terms, the very act of levying
such a charge would nevertheless collide frontally and irreconcilably
with the binding and plenary regulatory mandates promulgated by the
Reserve Bank of India under the aegis of Sections 21 and 35A of the
Banking Regulation Act, 1949. These directives, which operate with the
7 Revision Petition No. 2466/2007, (NCDRC)
Location: ORISSA HIGH COURT, CUTTACK
force and authority of subordinate legislation, categorically interdict
the levy of foreclosure or pre-payment penalties on floating-rate credit
facilities extended to MSMEs; any contractual clause that offends or
undermines this regulatory proscription stands ipso jure nullified and
is rendered a legal nullity in the eyes of the law.
26. Moreover, the Opposite Party No.1's insistence on enforcing such an
ex-facie impermissible and statutorily interdicted levy is not merely
ultra vires the binding regulatory architecture fashioned by the Reserve
Bank of India, but also strikes at the very ethos, spirit, and animating
objectives of the Competition Act, 2002, which denounces anti-
competitive practices designed to shackle borrower mobility, distort
market equilibrium, and perpetuate monopolistic rigidity. The
impugned demand raised by Indian Bank is, therefore, arbitrary in
conception, oppressive in its practical manifestation, and wholly
unsustainable in a juridical sense.
27. Its refusal to release the Petitioner's original title deeds and security
documents on the basis of such a tenuous, non-est, and statutorily
prohibited demand amounts to a palpable and egregious abuse of
authority, standing in stark violation of constitutional discipline, public
interest, and settled norms of administrative propriety. Such conduct,
being manifestly arbitrary and antithetical to the rule of law, cannot
withstand the rigours of judicial scrutiny under any recognised
standard, be it the Wednesbury doctrine, the modern arbitrariness test
Location: ORISSA HIGH COURT, CUTTACK
under Article 14, or the broader contours of constitutional morality and
fair play in action.
E. INSURANCE DELAYS, ALLEGED COERCION AND MALA FIDES
AND FIDUCIARY-LIKE DUTIES OF BANK
28.Banks, when acting as facilitators of insurance cover ancillary to credit
facilities, owe duties of good faith and fair dealing towards borrowers.
Undue pressure on borrowers to purchase particular insurance
products, and failure to process insurance claims with reasonable
expedition, especially where delay causes demonstrable loss, are
inconsistent with the Bank's regulatory and ethical obligations. The
Petitioner's evidence of alleged coercion to procure an SBI Life Personal
Insurance policy and of delay in processing the insurance claim and
compelling the Petitioner to undertake reconstruction expenditure
constitute matters of serious concern.
29.While this Court must be cautious in substituting its evaluation for that
of specialized insurance assessors, where delay is shown to be
unreasonable and caused by the Bank's omission and where such delay
results in hardship, the Court may direct remedial measures, including
compulsion to co-operate with insurers and to expedite assessment and
settlement.
F. RETENTION OF TITLE DEEDS AND COLLATERAL DOCUMENTS
-- LEGAL POSITION AND CONCLUSION:
30.Banks hold original title deeds and securities as custodians for the
purpose of credit security. At the point of full repayment and formal
Location: ORISSA HIGH COURT, CUTTACK
closure/takeover, banking practice and legal principle require
immediate release and return of original documents to the borrower.
The retention beyond lawful entitlement, in the absence of any
continuing legitimate charge or pending requirement, constitutes an
unreasonable interference with proprietary rights of the customer.
Article 300-A and the doctrine of legitimate expectation enjoin that
citizens should not be deprived of property save by lawful authority
and procedure.
31.On the record before this Court, the Petitioner has produced evidence
of payment of the sums necessary for takeover and has repeatedly
requested return of documents which the Bank has refused or
neglected to return. No credible justification is shown for continuing
retention. That conduct is found to be arbitrary and violative of the
Petitioner's proprietorial rights.
V. CONCLUSION:
32.In view of the foregoing analysis and upon an anxious consideration of
the material facts and circumstances of the case, this Court is of the
considered opinion that the Petitioner is entitled to waiver of the
foreclosure charges sought to be levied on the outstanding loan amount
on the date of its repayment. Consequently, Opposite Party Nos. 1 & 2
are directed to forthwith release the Petitioner's MSME's property
documents along with all other allied documents without insisting on
payment of such charges.
Location: ORISSA HIGH COURT, CUTTACK
33. Accordingly, the Writ Petition stands allowed in the foregoing terms.
Consequent reliefs shall follow in accordance with law. The parties
shall act in good faith to give effect to this judgment. The bank shall file
an affidavit of compliance as directed within one month from today. If
compliance is not affected, the Petitioner is at liberty to place the non-
compliance before this Court for further directions. No order as to
costs.
34. Interim order, if any, passed earlier stands vacated.
(Dr. Sanjeeb K Panigrahi)
Judge
Orissa High Court, Cuttack,
Dated the 29th November., 2025
