Prepayment Charges on Loan Terminated After Default Becomes Unsustainable: DRT Partly Allows ₹12.38 Lakh Kotak Mahindra Bank Claim [Read Order]

The Debts Recovery Tribunal, Delhi has held that pre-payment charges cannot be recovered if the loan agreement has already been terminated on account of default, while allowing the bank's recovery suit for ₹12.38 lakh in part.

The matter was brought before Presiding Officer Mr. S.K. Rastogi, who decided to assess whether the bank was entitled to claim foreclosure or pre-payment charges after recalling the loan facility on account of defaults in repayment of the same by the borrower.

The applicant, Kotak Mahindra Bank had granted a loan facility to the defendant, who had allegedly defaulted in the repayment of equated monthly installments (EMIs) on the same.

Further, the bank had issued a recall of the loan facility, terminating the same and claiming the outstanding dues along with contractual interest, penal interest, and prepayment charges.

Since the amount had not been paid, the bank had filed a recovery application for claiming the outstanding dues of ₹12.38 lakh along with interest. The bank had contended that the borrower was bound by the terms and conditions of the loan agreement, including the provisions for the levy of foreclosure charges.

However, the defendant had contended that since the loan had been recalled and terminated on account of default, the question of “pre-payment” did not arise since the repayment was no longer voluntary.

The Tribunal noted that normally, pre-payment charges apply when the borrower closes the account on his own prior to the expiry of the tenure of the loan. However, in this case, the loan had been terminated on account of default and recall by the bank itself. Therefore, the pre-payment charges were not legally tenable.

Accordingly, the Tribunal allowed the recovery of the outstanding principal amount along with the interest, but it did not allow the claim for the component of pre-payment charges. The recovery application was thus partly allowed that contractual charges must strictly align with the nature of the transaction and governing terms and conditions.

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