The High Court
Case Details
IN THE HIGH COURT OF ORISSA AT CUTTACK Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 W.P.(C) No.5653 of 2025 along with W.P.(C) No.31627 of 2024 (In the matters of Petitions under Articles 226 and 227 of the Constitution of India, 1950). M/s. Pratistha Engineering Limited, Bhubaneswar (in both the Writ Petitions) …. Petitioner(s) -versus- State Bank of India & Ors. …. Opposite Party (s) Advocates appeared in the case through Hybrid Mode: For Petitioner(s) For Opposite Party (s) : : Mr. Ramachandra Panigrahy, Adv. Mr. Jagabandhu Sahoo, Sr. Adv. Along with Mr. Dillip Kumar Mohapatra, Adv. CORAM: DR. JUSTICE S.K. PANIGRAHI DATE OF HEARING:-13.03.2025 DATE OF JUDGMENT:-09.05.2025 Dr. S.K. Panigrahi, J. 1. Since common questions of fact and law are involved in the above- mentioned Writ Petitions, the same were heard together and are being disposed of by this common judgment. However, this Court finds it Page 1 of 15 Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 appropriate to treat W.P.(C) No.3167 of 2024 as the leading case for proper adjudication of these matters. 2. The Petitioner in W.P.(C) No.3167 of 2024 is challenging the letter dated 13th November, 2024 issued by the Opposite Party Bank, whereby the sanctioned Fund-Based Working Capital (Cash Credit) limit in the Petitioner’s account was reduced from ₹14 Crore to ₹6 Crore. 3. The Petitioner is further challenging the action of the Opposite Party Bank in levying penal interest and compounding the same on a monthly basis, as well as the classification of his account as a Non-Performing Asset. I. FACTUAL MATRIX OF THE CASE:
Facts
4. The brief facts of the case are as follows: (i) The Petitioner is engaged in the business of construction, including the undertaking of contracts and sub-contracts for government and public sector undertakings, such as the National Highways Authority of India. (ii) The Petitioner had been availing various credit facilities from the Respondent Bank, including a Cash Credit facility through the primary account, and was concurrently operating Bank Guarantee and Guaranteed Emergency Credit Line accounts as secondary accounts. (iii) These facilities were fully secured by a mortgage over several immovable properties, having a collective market value approximately three times the sanctioned Cash Credit limit of ₹14 Crore. (iv) In 2017, the Petitioner was awarded a sub-contract by the National Project Implementation Agency of India. In order to comply with Page 2 of 15 Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 contractual obligations, the Petitioner requested the Bank to issue the requisite performance Bank Guarantee. (v) The Respondent Bank issued multiple assurances through letters dated 23.06.2017, 10.07.2017, 21.07.2017, and 16.08.2017, confirming the proposed issuance of the Bank Guarantee. However, the Bank did not proceed with the issuance of the guarantee, which led to the forfeiture of the earnest money deposit amounting to ₹3.23 Crore. (vi) Subsequently, the Petitioner secured another substantial contract valued at ₹90 Crore from PSK Infrastructure & Projects Pvt. Ltd. The Petitioner once again requested an enhancement of the Cash Credit limit and issuance of the requisite Bank Guarantee. The Respondent Bank, however, failed to act on the request, leading to the loss of the contract and the corresponding opportunity to generate significant business revenue. (vii) Despite repeated representations and formal requests made by the Petitioner for enhancement of the credit limit and issuance of Bank Guarantees, there was no substantive response from the Respondent Bank. (viii) As on 08.11.2024, the sanctioned Cash Credit limit continued to be ₹14 Crore, as reflected in the Bank’s official records. (ix) However, on 13.11.2024, the Respondent Bank reduced the sanctioned Cash Credit limit from ₹14 Crore to ₹6 Crore, citing irregularity in the account and non-receipt of repayments. (x) In addition to the said reduction, the Bank levied penal interest amounting to approximately ₹1.22 Crore and capitalized the same by Page 3 of 15 Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 compounding it on a monthly basis, thereby increasing the Petitioner’s financial liability. (xi) Aggrieved by the unilateral reduction of the sanctioned credit limit and the imposition of penal interest, the Petitioner filed W.P.(C) No. 31627 of 2024 before this Court. (xii) Subsequently, on 30.12.2024, the Respondent Bank classified the Petitioner’s Cash Credit account as a Non-Performing Asset, notwithstanding the existence of underlying disputes and the pendency of W.P.(C) No. 31627 of 2024. (xiii) The Petitioner, being further aggrieved by the classification of the account as NPA, has approached this Court by filing the W.P.(C) No. 5653 of 2025. II. SUBMISSIONS ON BEHALF OF THE PETITIONER: 5. (i) Learned counsel for the Petitioner earnestly made the following submissions in support of his contentions: The Petitioner submitted that he is a contractor/sub-contractor for various organisations, including NHAI. In 2017, he secured a sub- contract from NPIAI and, accordingly, requested the Respondent Bank to issue a Bank Guarantee/Performance Guarantee as required by the employer. Despite issuing several assurances through letters dated 23.06.2017, 10.07.2017, 21.07.2017, and 16.08.2017, the Bank failed to issue the Bank Guarantee, resulting in forfeiture of the Petitioner’s earnest money deposit of ₹3.23 Crores with NHAI. Page 4 of 15 Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 (ii) The Petitioner further submitted that he subsequently obtained a contract worth ₹90 Crores from PSK Infrastructure & Projects Pvt. Ltd. and again sought issuance of Bank Guarantee and enhancement of the credit limit. The Bank again failed to act, causing the Petitioner to lose both the contract and significant financial investment. (iii) The Petitioner submitted that, as on 08.11.2024, the Respondent Bank maintained a Cash Credit limit of ₹14 Crores. However, on 13.11.2024, the Bank abruptly reduced the limit to ₹6 Crores without furnishing any prior notice or justification. (iv) The Petitioner contended that the said coercive action was in violation of the Reserve Bank of India’s Circular dated July 2009, specifically Clause 2.1.2, which sets out the conditions under which a Cash Credit account may be classified as a Non-Performing Asset. (v) The Petitioner further submitted that none of the conditions stipulated under Clause 2.1.2 of the RBI Circular dated 01.07.2009, which defines when a Cash Credit account may be treated as “Out of Order,” were satisfied in the present case. Accordingly, the classification of the account as a Non-Performing Asset on 30.12.2024 was arbitrary and unlawful. The Petitioner submitted that the Respondent Bank failed to produce any documentary evidence to show that the account was overdrawn for a continuous period of 90 days, that there were no credits in the account for 90 days, or that the credits were insufocient to cover the interest debited, each of which is a mandatory criterion under the RBI guidelines for such classification. Page 5 of 15 Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 (vi) The Petitioner further submitted that, between 01.10.2024 and 13.11.2024, he deposited a total of ₹2.03 Crores into the account (₹2 Crores on 01.10.2024 and ₹3 Lakhs on 22.10.2024), thereby establishing that regular credits had been made within the 90-day period preceding the classification. (vii) The Petitioner submitted that the account was not overdrawn during the period from 13.08.2024 to 13.11.2024, except for a single day, i.e., 30.09.2024, which was promptly regularised the following day through a deposit of ₹2 Crore. The Petitioner contended that a one-day overdrawing, immediately rectified, does not meet the threshold for classifying an account as ‘Out of Order’ under the RBI guidelines or prevailing judicial interpretation. In support of this submission, the Petitioner relied upon the judgment in Rita Bagga v. Union of India1. (viii) The Petitioner submitted that, as on 30.12.2024, the outstanding amount in the account stood at ₹12.93 Crores, which was well within the sanctioned Cash Credit limit of ₹14 Crores. A further credit of ₹50 Lakhs was made on 31.12.2024, underscoring that the account was active and being regularly operated. (ix) The Petitioner further submitted that the Respondent Bank has charged and capitalized approximately ₹1.22 Crores as penal interest, an action that is impermissible in law. It was submitted that the Bank has consistently imposed and compounded penal interest since the inception of the loan account, despite regular repayments having been 1 2015 SCC Online All 7562. Page 6 of 15 Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 made by the Petitioner. In support of this argument, the Petitioner relied upon the observations of the Supreme Court in Central Bank of India v. Ravindra2, wherein it was categorically held that penal interest cannot be capitalized or compounded. The Petitioner further placed reliance on the RBI Circular dated 18.08.2023, which expressly prohibits all banks from charging or capitalizing penal interest, clarifying that such interest must be treated separately from contractual interest. (x) The Petitioner contended that the unlawful levy and compounding of penal interest effectively prevented him from fully utilizing the sanctioned Cash Credit limit, thereby causing significant business disruption and financial loss. (xi) The Petitioner submitted that, in the counter afodavit filed by the Respondent Bank in W.P. No. 31627 of 2024 on 16.01.2025, it was admitted that the Petitioner’s account was “indirectly saving” itself from being declared an NPA, indicating that, as of that date, the account had not yet been classified as such. However, in a subsequent reply filed on 05.02.2025 in I.A. No. 1594 of 2024, the Respondent Bank took a contradictory position, asserting that the account had already been declared an NPA on 30.12.2024. The Petitioner contended that these inconsistent statements demonstrate procedural impropriety and a lack of transparency, further vitiating the Bank’s decision to classify the account as a Non-Performing Asset. 2 AIR 2001 SC 3095. Page 7 of 15 Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 (xii) The submitted that, in view of the foregoing submissions, this Court may be pleased to declare the classification of the account as a Non- Performing Asset on 30.12.2024 as illegal, arbitrary, and in violation of the applicable RBI guidelines and binding judicial precedents. III. SUBMISSIONS ON BEHALF OF THE OPPOSITE PARTY: 6. (i) The Learned Counsel for the Opposite Party earnestly made the following submissions in support of his contentions: The present writ petition is not maintainable under Article 226 of the Constitution of India. The issues raised, such as the levy of penal interest, reduction of credit limits, and classification of the account as a Non-Performing Asset, involve disputed questions of fact and commercial decisions. These matters require adjudication through oral and documentary evidence and are, therefore, best suited for a civil court rather than for resolution under writ jurisdiction. (ii) The reduction of the Cash Credit limit from ₹14 Crores to ₹6 Crores was a commercial decision based on the Petitioner’s financial condition and creditworthiness. It does not involve any illegality or breach of statutory obligation. Accordingly, no cause of action arises for invoking the extraordinary jurisdiction of this Court. (iii) The principle of promissory estoppel is not applicable in the present case. The Petitioner expressly accepted the phased reduction of the credit limit as recorded in the sanction letter dated 14.12.2023. The said communication clearly stated that the limit would be reduced to ₹9 Crores by February 2024 and further to ₹6 Crores by October 2024. These terms were acknowledged by the Petitioner in his letter dated Page 8 of 15 Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 21.05.2024. Without challenging the original sanction, the Petitioner cannot now legally assail the consequent reduction of the limit. (iv) The allegation regarding the capitalization of penal interest is unfounded. During the period from 01.04.2024 to 10.12.2024, no instance of penal interest being capitalized has occurred. While penal interest may have been levied, it was not subjected to compounding. The Petitioner has failed to identify any specific entries in the account statements to support the allegation. Consequently, there is no breach of any prevailing judicial pronouncements or the RBI Circular dated 18.08.2023. (v) The valuation of the securities offered by the Petitioner has been exaggerated. As per the valuation report of the Bank’s appointed valuer, the market value of the mortgaged properties is ₹14 Crores, the realizable value is ₹13.68 Crores, and the government valuation is ₹8.04 Crores. The Petitioner’s claim that the value exceeds ₹70 Crores is unsupported and contrary to the documentary evidence available on record. (vi) The Petitioner has been availing credit facilities from the respondent Bank since 2006. The most recent renewal was communicated on 14.12.2023, which clearly recorded a phased reduction in the Cash Credit limit. These terms were accepted by the Petitioner. The reduction
Legal Reasoning
It is trite law that a clear distinction must be drawn between contractual interest and penal interest. While the former operates as compensation for the time value of money, the latter serves as a punitive imposition for the borrower’s failure to comply with repayment obligations. In Ravindra (supra), the Supreme Court articulated the legal position on penal interest, observing that such interest constitutes a penalty and cannot be capitalised. It was categorically held that penal interest can be charged only once for a period of default, and further interest, whether simple, compound, or penal, cannot be levied upon it. The relevant observations are replicated herein: “38. However “penal interest” has to be distinguished from “interest”. Penal interest is an extraordinary liability incurred by a debtor on account of his being a wrongdoer by having committed the wrong of not making the payment when it should have been made, in favour of the person Page 11 of 15 9. 10. Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 wronged and it is neither related with nor limited to the damages suffered. Thus, while liability to pay interest is founded on the doctrine of compensation, penal interest is a penalty founded on the doctrine of penal action. Penal interest can be charged only once for one period of default and therefore cannot be permitted to be capitalised.” “55. (1) Though interest can be capitalised on the analogy that the interest falling due on the accrued date and remaining unpaid, partakes the character of amount advanced on that date, yet penal interest, which is charged by way of penalty for non-payment, cannot be capitalised. Further interest i.e. interest on interest, whether simple, compound or penal, cannot be claimed on the amount of penal interest. Penal interest cannot be capitalised. It will be opposed to public policy.” 11. The aforementioned principles find clear consonance in regulatory directives issued by the Reserve Bank of India, particularly its Circular dated 18.08.2023. The said Circular mandates that any penalty charged for non-compliance with material terms and conditions of the loan agreement shall be treated as a “penal charge” and not levied in the form of additional interest. Crucially, it prohibits the capitalisation of such penal charges, stating that no further interest shall be computed thereon. The relevant portion is replicated hereinunder: “Penalty, if charged, for non-compliance of material terms and conditions of the loan contract by the borrower shall be treated as 'penal charges' and shall not be levied in the form of 'penal interest' that is added to the rate of interest charged on the advances. There shall be no capitalisation of penal charges, i.e., no further interest computed on such charges. However, this will not affect the normal procedures for compounding of interest in the loan account.” Page 12 of 15 Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 12. 13. 14. Thus, it is clear that both judicial pronouncements and regulatory directives unequivocally prohibit the capitalisation of penal charges, reinforcing the principle that such sums are to be treated distinctly and must not be subjected to interest accrual. As regards the classification of loan accounts as Non-Performing Assets, the governing regime is encapsulated in the Reserve Bank of India’s Master Circular on Income Recognition, Asset Classification, Provisioning & Other Related Matters dated 1st July 2009. In terms of Clause 2.1.2 of the Reserve Bank of India’s Master Circular on Income Recognition, Asset Classification, Provisioning and Other Related Matters dated 1st July 2009, a Non-Performing Asset is a loan or an advance where the account remains “out of order” for a period of more than 90 days in respect of an Overdraft or Cash Credit account. An account is treated as “out of order” if the outstanding balance remains continuously in excess of the sanctioned limit or drawing power. Even where the outstanding balance is within the sanctioned limit or drawing power, the account shall be treated as “out of order” if there are no credits continuously for 90 days, or if the credits are not sufocient to cover the interest debited during the same period. 15. These conditions are cumulative in nature and must be objectively established based on verifiable data. The Petitioner, relying on account statements, has demonstrated that substantial credits were made into the account within the ninety-day period preceding the date of classification. The account was not continuously overdrawn during this period, except for a single instance on 30 September 2024, which was Page 13 of 15 Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 promptly regularised on the following day. Moreover, as on 30 December 2024, the date on which the account was classified as a Non- Performing Asset, the outstanding liability stood within the sanctioned limit of fourteen crores of rupees. 16. The Respondent Bank on the other hand has not produced cogent material to rebut these facts. Its pleadings reveal inconsistency as in its afodavit dated 16.01.2025, it concedes that the account was “indirectly saving” itself from being declared an NPA, while in a subsequent afodavit dated 05.02.2025, it asserts that the account had already been classified as an NPA. Such contradictions expose a lack of procedural transparency and cast serious doubt on the legitimacy of the classification. Taken cumulatively, the actions of the Bank, including the unilateral reduction of credit limits, and the unlawful capitalisation of penal interest, reveal a pattern of opacity and a disregard for regulatory compliance. CONCLUSION: In view of the foregoing, this Court is of the considered opinion that the reduction of the Cash Credit limit from ₹14 Crores to ₹6 Crores was procedurally flawed and, in the absence of fair notice or opportunity, is liable to be set aside. The classification of the Petitioner’s account as a Non-Performing Asset on 30.12.2024 was not supported by the facts on record and was in contravention of Clause 2.1.2 of the RBI Master Circular dated 01.07.2009. Page 14 of 15 17. V. 18. 19. Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 20. 21. 22. Furthermore, the levy and capitalisation of penal interest were contrary to law as laid down in Ravindra (supra) and in violation of the RBI Circular dated 18.08.2023.
Arguments
implemented on 13.11.2024 was in accordance with the agreed terms. The Petitioner’s failure to challenge the original renewal terms bars any challenge to the subsequent implementation. Page 9 of 15 Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 (vii) The Petitioner was fully aware of the proposed reduction and associated timelines. Letters dated 21.05.2024 and 16.11.2024 confirm that the Petitioner was cognizant of the revised limit and the October 2024 deadline. Therefore, the reduction from ₹14 Crores to ₹6 Crores on 13.11.2024 cannot be said to be abrupt or violative of any obligation. (viii) The Petitioner’s audited financial statements for the financial years 2022–23 and 2023–24 disclose net losses of ₹3.08 Crores and ₹7.01 Crores respectively. There was insufocient cash flow to service the sanctioned credit facility. The Bank’s statutory auditor had flagged the account as stressed. Given the Petitioner’s financial position, the Bank’s credit decisions were prudent and justified. (ix) The Petitioner has instituted multiple proceedings, including a complaint before the National Consumer Disputes Redressal Commission seeking enhancement of the credit limit. This conduct demonstrates a pattern of parallel and vexatious litigation. The present writ petition appears to be another attempt to misuse legal process. (x) In light of the above, the writ petition is liable to be dismissed as misconceived, devoid of merit, and an abuse of the writ jurisdiction of this Court. IV. COURT’S REASONING AND ANALYSIS: 7. 8. Heard the learned counsel for the Parties and perused the materials placed on record. The central controversy which falls for adjudication in the present writ petition is threefold: Page 10 of 15 Signature Not Verified Digitally Signed Signed by: BHABAGRAHI JHANKAR Reason: Authentication Location: ORISSA HIGH COURT, CUTTACK Date: 14-May-2025 18:57:31 I. Whether the reduction of the sanctioned Cash Credit limit by the Respondent Bank from ₹14 Crores to ₹6 Crores, as communicated on 13.11.2024, was legally justified and carried out in accordance with due procedure II. Whether the classification of the Petitioner’s Cash Credit account as a Non-Performing Asset (NPA) on 30.12.2024 was in compliance with the applicable guidelines issued by the Reserve Bank of India and supported by the relevant facts; III. Whether the Respondent Bank levied and capitalised penal interest in violation of judicial decisions and regulatory directions, and if so, whether such action is sustainable in law.
Decision
Accordingly, both the Writ Petitions are allowed. The impugned actions of the Opposite Party Bank are hereby set aside. The classification of the Petitioner’s account as NPA dated 30.12.2024 is declared illegal and is quashed. The Bank is further directed to reverse any capitalised penal interest and to ensure compliance with the RBI Circular dated 18.08.2023 in letter and spirit. 23. Interim order, if any, passed earlier stands vacated. (Dr. S.K. Panigrahi) Judge Orissa High Court, Cuttack, Dated the 9th May, 2025/ Page 15 of 15