Date of the Judgment: 28 February 2020
Citation: Civil Appeal No. 1720 of 2020 (Arising out of SLP (Civil) No. 2007 of 2019)
Judges: D.Y. Chandrachud, J. and Hemant Gupta, J.
Can a bank deduct processing fees before a loan is sanctioned? The Supreme Court of India recently addressed this question in a dispute between Bank of India and one of its customers. The core issue was whether the bank was justified in deducting processing fees and other charges from the customer’s account before the loan was officially approved. The two-judge bench, comprising Justices D.Y. Chandrachud and Hemant Gupta, delivered the judgment, with Justice Hemant Gupta authoring the opinion.
Case Background
M/s. Brindavan Agro Industries Pvt. Ltd. (referred to as the ‘Consumer’) had an account with Bank of India (referred to as the ‘Bank’) in Agra. On 15th October 2011, the Consumer applied for various credit facilities, including an increase in working capital, a term loan, and letter of credit (LC) limits. The application was sent to the Bank’s Credit Processing Unit (CPU) on 4th November 2011. The Consumer revised its credit requirements multiple times, first on 6th December 2011 and again on 17th December 2011. On 30th December 2011, the Bank debited Rs. 27,41,165 from the Consumer’s account as processing fees, including charges for a Techno Economic Viability (TEV) study. The Consumer objected to this deduction on 9th February 2012, arguing that the fees should only be charged after the loan was sanctioned. The loan was eventually sanctioned on 17th March 2012, but the Consumer had already obtained credit from other banks.
Timeline
| Date | Event |
|---|---|
| 15th October 2011 | Consumer applies for credit facilities. |
| 4th November 2011 | Application sent to the Bank’s Credit Processing Unit (CPU). |
| 6th December 2011 | Consumer revises credit requirement. |
| 17th December 2011 | Consumer further revises credit requirement. |
| 30th December 2011 | Bank debits Rs. 27,41,165 from Consumer’s account for processing fees. |
| 9th February 2012 | Consumer objects to the deduction of processing fees. |
| 17th March 2012 | Bank sanctions the credit facilities. |
| 6th August 2013 | Consumer files a complaint under Section 17 of the Consumer Protection Act, 1986. |
| 13th July 2016 | State Consumer Disputes Redressal Commission (SCDRC) rules in favor of the Consumer. |
| 10th May 2018 | National Consumer Disputes Redressal Commission (NCDRC) upholds SCDRC’s order. |
| 28th February 2020 | Supreme Court sets aside the orders of SCDRC and NCDRC, ruling in favor of the Bank. |
Course of Proceedings
The Consumer filed a complaint under Section 17 of the Consumer Protection Act, 1986, which was allowed by the State Consumer Disputes Redressal Commission (SCDRC) on 13th July, 2016. The SCDRC directed the Bank to refund Rs. 27,41,165 with 9% interest from the date of filing the complaint. The Bank’s appeal to the National Consumer Disputes Redressal Commission (NCDRC) was unsuccessful on 10th May 2018. The Bank then appealed to the Supreme Court.
Legal Framework
The case primarily revolves around the interpretation of the Bank’s circular dated 20th April, 2005, which outlines the procedure for sanctioning loans, including the requirement for a TEV study and the collection of processing fees. The circular states that a TEV study is mandatory for new industrial projects, diversification projects, and accounts where restructuring is proposed, with total fund-based limits exceeding Rs. 500 lakhs. It also specifies that 50% of the appraisal fee should be collected upfront, and in case of non-sanction of limits by the Bank, 60% of the upfront fee is to be refunded. The circular also mentions that processing charges are to be recovered before the request for facilities is processed.
The relevant legal provision is Section 17 of the Consumer Protection Act, 1986, under which the Consumer had filed the complaint.
Arguments
Bank’s Arguments:
- The Bank argued that its circular dated 20th April, 2005, which is available on its website, mandates a TEV study for loans exceeding Rs. 500 lakhs.
- The Bank stated that appraisal fees for the TEV study are different from processing fees and are charged in applicable cases over and above the processing fees.
- The Bank contended that 50% of the appraisal fee should be collected upfront, and the balance is to be paid based on the actual sanctioned limits.
- The Bank referred to its communication dated 22nd August 2005, which states that processing charges are to be recovered before the request for facilities is processed.
- The Bank argued that the Consumer was aware of the processing charges and had sought a waiver of 50% of these charges.
- The Bank submitted that it sanctioned the credit facilities within three months from the final modified request of the Consumer.
Consumer’s Arguments:
- The Consumer contended that the Bank’s circular dated 20th April, 2005, was never brought to its notice and, therefore, it is not bound by the conditions mentioned in the circular.
- The Consumer argued that the Bank took an extraordinarily long time to sanction the loan, which compelled it to seek credit facilities from other banks.
- The Consumer stated that the amount of Rs. 27,41,165 was debited from its account without its consent and knowledge.
- The Consumer argued that the Bank had agreed to a 50% discount on processing and other charges and should have charged only 1/4th of the TEV charges and PPC charges.
| Main Submissions | Sub-Submissions | Party |
|---|---|---|
| Applicability of Bank’s Circular and Procedure | Circular mandates TEV study for loans exceeding Rs. 500 lakhs | Bank |
| Appraisal fees are separate from processing fees | Bank | |
| 50% of appraisal fee should be collected upfront | Bank | |
| Circular was not brought to the notice of the Consumer | Consumer | |
| Deduction of Processing Fees | Processing charges are to be recovered before processing the request | Bank |
| Amount was debited without consent | Consumer | |
| Consumer sought a waiver of 50% of charges | Bank | |
| Delay in Sanctioning Loan | Bank sanctioned loan within three months of final request | Bank |
| Bank took an extraordinarily long time to sanction the loan | Consumer | |
| Discount on Charges | Bank agreed to 50% discount on charges | Consumer |
| Bank never disagreed to the concession sought | Consumer |
Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame issues in a separate section. However, the main issue was whether the Bank was justified in deducting the processing fees and TEV study charges from the Consumer’s account before the loan was sanctioned, and whether the Consumer was entitled to a refund of the deducted amount.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether the Bank was justified in deducting processing fees and TEV charges before loan sanction? | Yes, the Bank was justified. | The Consumer was aware of the processing charges, had sought a waiver, and the Bank’s circular allowed for upfront deduction. |
| Whether the Consumer was entitled to a refund of the deducted amount? | The Consumer was entitled to a partial refund of Rs. 9.16 lakhs. | The Bank had agreed to refund Rs. 9.16 lakhs from the processing charges, which the Consumer had not accepted, but the Court held that the Consumer was entitled to this amount. |
Authorities
The Supreme Court did not cite any specific case laws or books in its judgment. However, the Court did consider the following:
- Bank’s Circular dated 20th April, 2005: This circular outlines the procedure for sanctioning loans, including the requirement for a TEV study and the collection of processing fees.
- Bank’s communication dated 22nd August, 2005: This communication clarifies that processing charges are required to be recovered before the request for facilities is processed.
- Consumer’s request letter dated 15th October, 2011: In this letter, the Consumer sought a waiver of 50% on various charges.
| Authority | How the Authority was Considered |
|---|---|
| Bank’s Circular dated 20th April, 2005 | Followed – The Court relied on this circular to justify the Bank’s actions regarding TEV study and processing fees. |
| Bank’s communication dated 22nd August, 2005 | Followed – The Court used this communication to support the Bank’s practice of recovering processing charges upfront. |
| Consumer’s request letter dated 15th October, 2011 | Acknowledged – The Court noted that the Consumer was aware of the charges and had sought a waiver of 50%. |
Judgment
| Submission by Parties | How the Court Treated the Submission |
|---|---|
| Bank’s submission that its circular mandates a TEV study and upfront collection of fees. | Accepted – The Court agreed that the circular was binding and the Bank was justified in collecting the fees. |
| Consumer’s submission that the circular was not brought to its notice. | Rejected – The Court held that the Consumer, being an old customer, was expected to be aware of the Bank’s procedures. |
| Consumer’s submission that the Bank took an extraordinarily long time to sanction the loan. | Not Specifically Addressed – The Court did not find the delay to be a significant factor in the case. |
| Consumer’s submission that the amount was debited without consent. | Rejected – The Court stated that the Consumer was aware of the charges and had sought a waiver. |
| Consumer’s submission that the Bank agreed to a 50% discount on charges. | Partially Accepted – The Court acknowledged the request for a 50% waiver but held that the waiver was for all charges combined, not individual charges. |
| Bank’s submission that it agreed to refund Rs. 9.16 lakhs from processing charges. | Accepted – The Court held that the Consumer was entitled to this refund, although the Consumer had not accepted the proposal. |
How each authority was viewed by the Court?
- The Bank’s Circular dated 20th April, 2005 was viewed as a valid document that outlined the procedure for sanctioning loans and was binding on the Consumer.
- The Bank’s communication dated 22nd August, 2005 was viewed as a valid clarification that processing charges are to be recovered before the request for facilities is processed.
- The Consumer’s request letter dated 15th October, 2011 was viewed as an acknowledgement by the Consumer of the applicable charges and a request for a waiver of 50% of those charges.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the following factors:
- Awareness of Charges: The Court emphasized that the Consumer was an existing customer and was aware of the Bank’s procedures and processing charges. The Consumer had even requested a waiver of 50% of these charges, indicating prior knowledge.
- Bank’s Circulars: The Court relied on the Bank’s circulars, which clearly stated that processing fees and TEV study charges are to be collected upfront. These circulars were considered binding on the Consumer.
- Reasonableness of Charges: The Court noted that the charges were for availing credit facilities and were reasonable. The Consumer had sought a waiver of 50% of all charges, which implied an acknowledgment of the charges.
- Partial Refund: The Court acknowledged that the Bank had agreed to refund Rs. 9.16 lakhs from the processing charges, and thus directed the Bank to refund this amount.
| Sentiment | Percentage |
|---|---|
| Awareness of Charges | 30% |
| Bank’s Circulars | 30% |
| Reasonableness of Charges | 20% |
| Partial Refund | 20% |
| Ratio | Percentage |
|---|---|
| Fact | 40% |
| Law | 60% |
The Court’s reasoning was a mix of factual considerations (such as the Consumer’s awareness and the Bank’s actions) and legal considerations (such as the interpretation of the Bank’s circulars and the Consumer Protection Act). The legal aspects weighed more heavily in this case, as the Court relied on the Bank’s circulars and the established procedure for loan processing.
The Court considered the Consumer’s argument that the Bank had taken an extraordinarily long time to sanction the loan, but it did not find this argument to be a significant factor in the case. The Court’s primary focus was on the Bank’s right to collect processing fees as per its established procedures and circulars.
The Supreme Court’s decision was based on the following reasons:
- The Consumer was an existing customer and was aware of the Bank’s procedures and processing charges.
- The Bank’s circulars mandated the upfront collection of processing fees and TEV study charges.
- The Consumer had sought a waiver of 50% of all charges, indicating prior knowledge of the charges.
- The Bank had agreed to refund Rs. 9.16 lakhs from the processing charges.
The Court quoted the following from the judgment:
“The Consumer admittedly was an old customer of the Bank who applied to avail credit facilities of more than Rs.40 crores and it is unbelievable that it was unaware of the procedure and the Circulars of the Bank.”
“The Consumer was aware of the processing charges and had sought a waiver of the processing charges, therefore, the processing charges had been debited by the Bank on 30th December, 2011 in terms of authority given by the Consumer on 19th January, 2011”
“Therefore, we find that the Consumer is entitled to refund of Rs.9.16 lakhs only in terms of the decision of the Bank communicated to the Consumer rather than waiver of TEV charges in its entirety.”
There were no minority opinions in this case. The bench was composed of two judges who agreed on the final decision.
Key Takeaways
- Banks are generally allowed to deduct processing fees and other charges upfront, as long as they have clear procedures and circulars in place.
- Customers are expected to be aware of the procedures and circulars of the banks they deal with, especially if they are existing customers.
- Seeking a waiver of charges implies an acknowledgment of those charges.
- Partial refunds may be granted if the bank has agreed to such refunds, even if the customer has not accepted the proposal.
Directions
The Supreme Court directed the Bank to refund a sum of Rs. 9.16 lakhs to the Consumer within two months from the date of the order.
Development of Law
The ratio decidendi of this case is that banks can deduct processing fees and other charges upfront if they have clear procedures and circulars in place, and customers are expected to be aware of these procedures. This judgment clarifies the position of law regarding the deduction of processing fees by banks and highlights the importance of transparency and awareness in banking transactions. There is no change in the previous position of law, but a clarification of the existing position.
Conclusion
The Supreme Court set aside the orders of the SCDRC and NCDRC, ruling in favor of the Bank on the issue of deduction of processing fees. The Court held that the Bank was justified in deducting the processing fees and TEV study charges upfront, as the Consumer was aware of these charges and the Bank’s procedures. However, the Court directed the Bank to refund Rs. 9.16 lakhs to the Consumer, as the Bank had agreed to this refund. This judgment reinforces the importance of clear procedures and transparency in banking transactions and emphasizes the need for customers to be aware of the terms and conditions of their banking relationships.
Category
Parent Category: Banking Law
Child Category: Bank Charges
Child Category: Loan Processing Fees
Child Category: Consumer Protection Act, 1986
Parent Category: Consumer Protection Act, 1986
Child Category: Section 17, Consumer Protection Act, 1986
FAQ
Q: Can a bank deduct processing fees before a loan is sanctioned?
A: Yes, a bank can deduct processing fees before a loan is sanctioned if it has clear procedures and circulars in place, and the customer is aware of these procedures.
Q: What is a TEV study charge?
A: A TEV (Techno Economic Viability) study charge is a fee charged by banks to assess the technical and economic feasibility of a project for which a loan is being sought.
Q: Can a customer get a refund of processing fees if the loan is not sanctioned?
A: It depends on the bank’s policy. In this case, the bank had a policy to refund a portion of the upfront fee if the loan was not sanctioned.
Q: What if the bank’s circular was not brought to the notice of the customer?
A: The Supreme Court held that existing customers are expected to be aware of the bank’s procedures and circulars.
Q: What does it mean to seek a waiver of charges?
A: Seeking a waiver of charges implies that the customer is aware of the charges and is requesting a reduction or elimination of those charges.