R.F. Nariman, J. - (1.) A writ petition, by way of a Public Interest Litigation, filed under Article 32 of the Constitution of India, assails the constitutional validity of Section 21A of the Banking Regulation Act, 1949. The aforesaid section was introduced into the Banking Regulation Act by the Banking Laws (Amendment) Act of 1983 with effect from 15.2.1984. Section 21A of the Banking Regulation Act reads as under: "21A. Rates of interest charged by banking companies not to be subject to scrutiny by courts Notwithstanding anything contained in the Usurious Loans Act, 1918 (10 of 1918), or any other law relating to indebtedness in force in any State, a transaction between a banking company and its debtor shall not be reopened by any court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive."
(2.) It will be seen that Section 21A interdicts the reopening by courts of a debt between a banking company and its debtor, on the ground that the rate of interest charged by the banking company, in respect of a loan transaction, is excessive. The section seeks to keep out of harm's way the Usurious Loans Act, 1918 and/or any other State legislation relating to indebtedness, and then declares that no such loan transaction shall be reopened by any court on the ground of charging of excessive rates of interest. The writ petition has been filed by certain public spirited citizens, who rely on the report of the Parliamentary Standing Committee on Agriculture for the year 2006-2007 to say that Section 21A should be abolished, insofar as it applies to rural indebtedness. The Standing Committee's Report reads as follows: "The Committee feels that the worst exploitation of farmers is through the adverse credit policies of the financial institutions which compel farmers to starve under the burden of loans and commit suicides. The Committee finds that in 1918, the British passed the Usurious Loans Act which provided that no farmer could be charged a rate of interest higher than the authorised rate- which at that time was 5.5 per cent, and if charged, the case could be re-opened in court and the entire account re-settled. Moreover, the total amount of interest could not be higher than the original capital. But in 1949, the Banking Regulation Act was passed which made a special provision under Section 21 (A) saying that these will not apply to banking companies including cooperative banks. In view of the plight of farmers due to heavy burden of credits, the Committee recommend that section 21 (A) of the Banking Regulation Act should be scrapped. All out concerted efforts should be made to bring down the rate of interest on Farm Credit to the level of 5.5% simple interest, as it used to be in the early 20th century. In case of cooperatives, transaction cost/margin at each layer must be reduced as the length of chain, from RBI to NABARD to State-District and Cooperative Societies at village level and Regional Rural Banks, is very big. Eventually, the farmer has to take the burden of all these middlemen/lending agencies. The Committee, therefore, recommends to shorten this chain, so that the eventual creditor is directly linked to the borrower. The Committee further desire the Government to ensure that in no case, the interest should be higher than the original capital and charging of compound rate of interest should be absolutely prohibited so that exploitation of farmers by financial institutions is minimized. REPLY OF THE GOVERNMENT 1.23 The Government in their action taken reply have stated that in order to bring down rate of interest on farm loans it has been announced in the Union Budget for the year 2006-07 that effective from Kharif 2006-07, farmers would receive crop loans upto a principal amount of Rs. 3 lakh at 7% rate of interest and the Government of India would provide necessary interest subvention for this purpose. Crop loans to farmers are generally made available through Kisan Credit Cards (KCC) which are valid for 3 years. As incentive for good performance, credit limits under KCC could be enhanced to take care of increase in costs, change in cropping pattern etc. Banks have been advised by RBI that total interest debited to an account should not exceed the principal amount in respect of short term loans advanced to small and marginal farmers. As per the extant RBI instructions, banks are not allowed to compound interest on current dues of crop loans and term loans in respect of direct agricultural advances granted to farmers. If such loans become overdue banks have been advised that where the default is due to genuine reasons, they should extend the period of loan or reschedule the installments under term loans. Once such a relief has been extended the over dues become current dues and hence banks should not compound interest thereon. In case of long duration crops, interest is recovered only annually. COMMENTS OF THE COMMITTEE 1.24 The Committee are dismayed to know that the Department has not paid any heed to the recommendation of the Committee to scrap Section 21 (A) of Banking Regulation Act, 1949 which hinders the provision of Usurious Loans Act, 1918 under which it was, inter alia, provided that the total amount of interest on a loan taken by a farmer could not be higher than the original capital. The Committee, therefore, reiterate their earlier recommendation that Section 21 (A) of the Banking Regulation Act, 1949 should be deleted so as to ensure that no Bank charges interest more than the original capital, irrespective of the fact, whether it is a short term loan or long term loan, from small and marginal farmers. Moreover, the issue of cutting the costs/margin at each layer of cooperative has also not been addressed. The Committee, therefore, reiterates their earlier recommendation to shorten the chain of cooperative loan institutions and directly link the eventual creditor to the borrowers." According to the petitioners, a total number of 2,56,913 farmers have committed suicide in India between the years 1995 to 2010, and this is because, and directly linked to, usurious rates of interest being charged from them by banks, which cannot be interfered with by courts, thanks to Section 21A.
(3.) Shri Sanjay Parikh, learned counsel appearing on behalf of the writ petitioners, took us through the Usurious Loans Act to show that in British India, even a foreign power was alive to the fact that courts need to interdict excessive rates of interest, and have been given complete freedom to do so, depending on the facts of each case, including taking into account the plight of the farmer debtor. He also referred to and relied upon various State Debt Relief Acts, by which every State has recognized this, and has, thus, provided, by way of legislation, that loans and interest thereon either be waived totally or partially or that courts may come to the rescue of the farmer debtor by lowering the rate of interest. According to him, many States adopted the rule of Damdupat so that in no circumstance can interest charged, for any period whatsoever, exceed the principal amount of loan. He strongly relied upon this Court's judgments in Fatehchand Himmatlal & Ors. v. State of Maharashtra etc., 1977 2 SCC 670 and Pathumma and Ors. v. State of Kerala and Ors, 1978 2 SCC 1, to show that State Debt Relief Acts have been unsuccessfully challenged in this Court, and are referable to Entry 30, List II of the Seventh Schedule to the Constitution. He referred to the Constituent Assembly Debates to show that that part of Entry 30, List II, which speaks of relief of agricultural indebtedness, was introduced by the Constitution for the first time, not being in the predecessor entry in the Government of India Act, 1935. He also referred to and relied upon a proposed amendment by Shri Shibban Lal Saxena, by which it was sought to place the aforesaid Entry 30 into the Concurrent List, so that Parliament may also have a say in the relief of agricultural indebtedness. However, this was turned down by the Constituent Assembly, so that this subject is exclusively within the domain of the State legislature.;