Some banks may agree to a particular interest rate during negotiation, but increase it at the time of sanction. The Reserve Bank of India does not bother to regulate such practices, but the national commission has given a landmark ruling that will help those in similar situations.
Eight members of the Bajaj family had individually applied to ICICI Bank for a loan. In the correspondence, the bank agreed to advance money on depositing kisan vikas patras (KVPs) towards 10 per cent margin money. Each applicant withdrew Rs 20 lakh from his provident fund account to buy KVPs for a loan of Rs 2 crore. While the KVPs would earn interest at eight per cent per annum, the interest on the loan would be 6.4 per cent. The applicants were told this difference in the rate would benefit them Rs 60 lakh over the loan’s tenure.
After sanction, they were made to execute standard format documents. These were signed on the presumption that they were according to the terms stated in the correspondence. When the bank demanded higher interest - initially seven, then 7.75 and later 9.5 per cent - the applicants realised how they had been tricked into signing the documents. Additionally, the bank also deducted Rs 6,69,465 as processing fee. The applicants' representations to the bank were ignored. So, they filed a joint complaint before the national commission.
The bank contended the agreements contained a specific condition that the interest rate decided by it from time to time would be applicable. Also, at the time of enhancement of the loan, fresh agreements had been executed, agreeing to a variable interest rate.
The commission observed the contract had already been completed on the basis of the correspondence exchanged between the parties. The written agreement permitting the bank to charge a higher interest rate was subsequent to the finalisation of the contract and the purchase of the KVPs. So, it could not be enforced. No prudent investor would give a free hand to the banker to raise the interest rate. The commission concluded the increase in the interest rate as well as the levy of the processing fee, despite agreeing not to charge it, would amount to unfair trade practices.
The national commission noted the law commission had observed in its report that standardised contracts are pretended contracts, prepared by only one party and offered to the other, on a "take-it-or-leave-it" basis. The main terms are put in large print, but the qualifications are buried in small print. The individual's participation consists of a mere adherence, often unknowing, to the document drafted unilaterally and insisted upon by the powerful enterprise; the conditions imposed by the document upon the customer are not open to discussion, nor are they subject to negotiation between the parties, but the contract has to be accepted or rejected as a whole. These contracts are produced by the printing press. The signature on the dotted line does not really represent the signatory's agreement to all the terms, but creates a fiction of having agreed to such terms. The characteristics usually and traditionally associated with a contract, such as freedom to contract and consensus, are absent from these so-called contracts. However, there is no general provision in the Contract Act under which courts can give relief to the weaker party.
The national commission held that regardless of the provisions of the Indian Contract Act, the Consumer Protection Act empowers the consumer fora to cure the mischief adopted by one of the contracting parties. In case a condition in such a standardised contract is unjustified or unilateral, it may amount to an unfair trade practice. Hence, relief under the Consumer Protection Act can be granted.
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The commission directed the bank to discontinue the unfair trade practice and to recalculate the interest at a rate not exceeding 6.4 per cent. The bank was also directed to pay costs amounting to Rs 50,000.
This judgement should send a signal to banks that its time to stop resorting to devious and manipulative practices.
