Loan Not Fully Disbursed, Project Stalled: DRAT Upholds Interest Rate Reduction to 10% by DRT and Dismisses HUDCO’s Appeal [Read Order]

The Allahabad bench of the Debt Recovery Appellate Tribunal (DRAT) has affirmed the Debt Recovery Tribunal’s (DRT) order, which reduced the contractual interest rate from 15.75% per annum (with quarterly rests) to 10% simple interest per annum, as there was an incomplete disbursement of the loan.

The Housing and Urban Development Corporation Ltd. (HUDCO) had sanctioned financial assistance to the borrower company, the respondent Shashi Bhusan Cold Storage Pvt Ltd. (Respondents 2-5) were standing as the guarantors. To secure repayment, the guarantors executed personal guarantees and also created an equitable mortgage over their properties.

But the borrowers defaulted, and the account was classified as a Non-Performing Asset (NPA). HUDCO sought the recovery of Rs. 2.55 crore as of July 2012, along with future interest at the contractual rate of 15.75% per annum. The DRT allowed the claim but reduced the future interest to 10% simple interest, citing reasons that HUDCO had not disbursed the entire sanctioned loan amount in time, which hampered completion of the project.

HUDCO, aggrieved by this decision, filed an appeal before the DRAT. It was argued that the tribunal has no authority to alter the contractual rate of interest without sufficient reasons. It was further argued that the agreed rate of 15.75% should have been enforced until realization of dues.

The borrower, however, defended the DRT’s order, pointing to the Recovery Officer’s report dated 17 July 2013, which confirmed delayed and incomplete disbursement of the sanctioned loan. The borrower placed its dependence on the Supreme Court’s ruling in Punjab & Sind Bank v. Allied Beverage Company Pvt. Ltd. (2010), which recognised judicial discretion in awarding interest when disbursement irregularities affect project viability.

The DRAT examined the record and upheld the DRT’s reasoning. It noted that the Tribunal had explicitly recorded in paragraph 16 of its order that since the sanctioned loan was not fully disbursed so it was proper to reduce future interest at 10% simple interest.

The Appellate Tribunal emphasised that once an account is classified as NPA and recovery proceedings are initiated, the contractual terms of the loan agreement cease to govern future interest.

Instead, courts and tribunals exercise discretion under Section 34 of the Code of Civil Procedure, as clarified by the Supreme Court in Central Bank of India v. Ravindra (2002). That judgment held that while banks may claim contractual interest until the date of suit, post-decree interest is subject to judicial discretion and may be awarded at a rate deemed fit, not exceeding statutory limits.

Applying these principles, the bench of RD Khare (Chairperson) concluded that the DRT had acted within its jurisdiction and discretion in reducing the interest rate. The Tribunal observed that HUDCO’s failure to disburse the loan in full and on time directly contributed to the borrower’s inability to complete the project, justifying a lower rate of interest.

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