The National Consumer Disputes Redressal Commission ( NCDRC ) has held that a loan obtained by a proprietorship firm does not qualify as an individual borrowing according to Reserve Bank of India ( RBI ) guidelines.
In the case HDB Financial Services Ltd. v. M/s. Somanis & Anr., the NCDRC set aside the orders of the lower consumer forums that had found HDB Financial Services liable for deficiency in service for charging prepayment penalties on a loan provided to the complainant.
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The complainant, M/s. Somanis, a proprietorship firm, had obtained a loan of Rs. 4 crore from HDB Financial Services Ltd. and sought to prepay the loan. The dispute arose when the financial service provider levied a prepayment penalty of Rs. 17,00,851.40, which the complainant argued was in violation of the RBI circular dated May 7, 2014, that prohibited charging penalties for prepayment by individual borrowers.
Upon revision, the NCDRC overturned the lower forums’ orders. The Commission observed, “It is essential to note that the loan was obtained by the complainant on behalf of the proprietorship firm, and not in individual capacity.” The NCDRC further referenced the RBI guidelines and the interpretation given by the Madras High Court in the case of S Manoharan v. Reserve Bank of India and others, where it was held that the term “individual borrower” as used in RBI circulars could not be applied to loans taken by proprietorship firms.
It was noted by the Single Member Bench of AVM J. Rajendra, AVSM VSM that “In the present case, it is essential to note that the loan was obtained by the complainant on behalf of the proprietorship firm, and not in individual capacity. In the present matter, it is essential to note that the loan was acquired by the Complainant on behalf of the proprietorship firm, and not in an individual capacity.
The loan agreement, which was duly executed and entered into by the parties, explicitly included provisions regarding prepayment charges. The terms and conditions, including the prepayment charges, were clearly agreed upon by both parties. Additionally, the loan was obtained in 2015, whereas the RBI circular concerning the prohibition of prepayment charges was issued in 2019. As a matter of law, regulatory changes such as those introduced by RBI circular which have impact on contractual obligations already mutually agreed upon and financial implications cannot be applied retrospectively, unless specifically provided for by the issuing authority. The position is same even in the event of such RBI circulars with adverse implication on the complainant.
Thus, the provisions of the 2019 RBI circular are not applicable to the loan agreement executed in 2015.”
The NCDRC highlighted that, “The interpretation of the scope of the term ‘individual borrower’ in the said circulars given by the Hon’ble Madras High Court is of import to the present case,” adding that a proprietorship firm represented by its sole proprietor cannot be construed as an individual borrower.
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The Commission also noted that the loan was obtained in 2015, whereas the RBI circular prohibiting prepayment charges was issued in 2019, and such regulatory changes could not be applied retrospectively.
The quasi judicial ruling noted that consumer courts should not interfere with loan agreements that have been duly executed, particularly when the contractual terms, including prepayment charges, were clearly outlined and agreed upon by the parties.
Consequently, the NCDRC allowed the revision petition filed by HDB Financial Services Ltd., setting aside the previous orders and ruling that the prepayment charges were valid as per the terms of the original loan agreement.
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