Banks cannot Reduce Contractual Fixed deposit (FD) Rates in Mid-term: Allahabad HC says Depositors Cannot suffer due to Bank’s Oversight [Read Order]

The Allahabad High Court has ruled that the depositor cannot suffer for the bank's mistake in offering higher interest. It held that the banks cannot reduce the Fixed deposit (FD) rates in the mid-term and directed the bank to pay the interest in the original or the agreed rate.

“Once it is found that beneficiary has not made any misrepresentation and cannot be held liable for suggestio falsi or for suppressio vari, having promised a particular rate of interest upon which investor agreed to invest money by creating FDRs, the bank cannot later on upon maturity, deny the agreed/promised rate of interest,” observed the division bench of Justice Swarupama Chaturvedi and Justice Ajit Kumar.

As per the petition, many Fixed Deposit Receipts (FDRs) were created by petitioner no. 1 - Nem Kumar Jain with his mother, Yashoda Jain (petitioner no. 2), and his father, late P.K. Jain, who was a retired staff member of the Oriental Bank of Commerce.

These FDRs were created on the interest rate of 10.75% per annum, with a maturity period of ten years, and the total maturity amount payable was Rs. 44,63,051/-. The petitioners had also created another FDR on 18.02.2014 for an amount of Rs. 1,00,000/-, carrying an interest rate of 10.25% per annum and maturing on 18.02.2024, with a maturity value of Rs. 2,75,134/-.

The petitioner submitted that the Oriental Bank of Commerce was merged with the Punjab National Bank in the year 2020. The bank, without issuing any show cause notice or affording any opportunity of hearing to the petitioners, reduced the contracted rate of interest on various FDRs from 10.75% to 9.25%, and from 10.25% to 8.25%.

When the petitioners approached the bank, the letter was provided to the petitioner stating that the FDRs interest rate has been deducted according to Circular No. HO/CS&P/22/2014- 15/248 dated July 3, 2014.

The respondent - bank clarified that benefits of additional interest of banks’ staff members or retired member was available only in case the staff member or retired staff members had an account singly or jointly with family member where the staff member/retired staff member was the Principal Account Holder but the FDRs in these petitions were made before the date of circular and hence it was cited as reason to reduce the rate of interest.

It was argued that the circular cannot be applicable retrospectively and the respondent has not provided any information to the petitioner till the year 2020 and there is no provision to make this circular retrospective.

The counsel of the petitioner contended that the petitioners had genuine expectation of receiving the matured amount at the rate mentioned in the FDRs, and such contractual assurance cannot be unilaterally altered by the Bank after the FDRs had been issued.

The court read the Master circular of RBI produced by the petitioner. After reading the circular, the bench noted that the Scheduled Commercial Banks are mandated to pay interest on term deposits strictly in accordance with the schedule of interest rates disclosed in advance.

Referring to the provisions of the circular, the court said that ‘These provisions cumulatively establish the principle that once the rate of interest is mentioned at the time of issuance of the FDR, the same cannot be unilaterally altered to the detriment of the depositor.”

The high court referred to the Supreme Court case Navjyoti Coop. Group Housing Society v. Union of India, where it was held that “where the issuance of the FDRs with a clearly stated and higher rate of interest constituted an express terms of contract by the respondent bank, on the basis of which the petitioners has acted and allowed their deposits to remain with the bank for the full tenure.”

The court also added that none of the RBI directions, circulars, and the enabling provisions relating to additional interest for bank staff, retired staff, and senior citizens, empower the respondent bank to retrospectively reduce the rate of interest already contracted in an FDR.

In the case of Smt. Sarojni Jain and Smt. Shalini Agarwal, it was held that the petitioners cannot be made to suffer for any error or oversight by the bank in offering a higher rate of interest. The same principle is squarely applicable to the present petitions, noted the court.

While allowing the petition, the court held that the reduction of FD rate by the bank was not legal and authorised. Also, none of the RBI circulars or the guidelines do not empower the bank to alter previously agreed contractual terms.

Therefore the high court ordered the bank to compute and pay the interest on the petitioner’s FDRs at the originally contracted rates of interest as mentioned on each FDRs, from the respective dates of maturity of the FDRs, and deductions.

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