Namburi Appala Raju and Another vs State Bank of India

S.V. Maruthi, J.—The appeal arises out of the judgment of the learned Subordinate Judge, Rajam in O.S. No. 5 of 1985 dated 6-9-1991. The defendants are the appellants. The plaintiff-State Bank of India, Cheepurupalli Branch, filed the suit for recovery of Rs. 3,14,595-03 ps. from the defendants. The plaint averments in brief are as follows:-

The 1st defendant approached the plaintiff-Bank for grant of loan for setting up of a poultry farm in Munisinivalasa, hamlet of Routhupeta Bonduru taluk, Srikakulam District. The plaintiff-Bank advanced a term loan of Rs. 1,04,000/- on the security of first defendant''s immovable property. The 2nd defendant was the guarantor. The defendant executed a deed of mortgage and hypothecation in respect of suit debt on the plaint schedule property and the same was registered on 29-11-1973. The agreed rate of interest is 11% per annum with half yearly rests subject to the revision of the interest from time to time. The 1st defendant availed the loan facility to an extent of Rs. 76,649-01 ps. The loan debt is repayable in 60 monthly instalments of Rs. 1,000/- with half yearly lumpsum payment of Rs. 5,000/- for eight half years and a final balance payment of Rs. 4,000/- at the end of 9th half year - the first monthly installment commencing from September, 1974. However, an amount of Rs. 3,14,595-03 ps. is due as on 23-2-1985. The defendants executed revival letters acknowledging the debt due to the bank on 30-6-1982 in favour of the bank. In spite of repeated demands, the defendants have not discharged the loan. Hence, the suit.

The 1st defendant filed a written statement denying the averments made in the plaint. However, he has admitted that he had approached the plaintiff-Bank for term loan of Rs. 1,04,000/- for setting up a poultry unit at their village under agricultural loans scheme and that the loan was sanctioned for which he had executed a mortgage deed dated 29-11-1973 mortgaging Ac.1.80 cts. of dry land situated in plot No. 279 and S.No. 31 of Maminivalasa village. He has admitted that the 2nd defendant is the guarantor for the loan transaction. The 2nd defendant filed a memo adopting the written statement of the 1st defendant. It is not necessary to refer to the other averments in the plaint as well as in the written statement for the purpose of disposing of the appeal.

"(1) Whether the plaintiff is entitled for personal decree for the suit amount against the 2nd defendant as prayed for?

(2) Whether the plaintiff is entitled for suit amount by sale of the plaint-schedule mentioned properties?

(3) Whether the plaintiff is entitled to recover the balance amount of decree debt if any from the 1st defendant personally?

(4) Whether the plaintiff is entitled for subsequent interest at 14.5% with half yearly rests as prayed for?

(5) Whether the suit is bad for nonjoinder of necessary parties?

(6) Whether the defendants are not liable to pay interest as calculated by the plaintiff?

(7) Whether the 2nd defendant''s liability is barred by time?

(8) Whether the defendants are entitled for exemplary costs?

(9) To what relief ?

The plaintiff-Bank examined 7 witnesses and marked Exs.A-1 to A-25 while the 1st defendant is examined as D.W.1 and no exhibits were marked on behalf of the defendants. The trial Court decreed the suit with 12% interest from the date of the suit till the date of payment.

Six months'' time was granted for redemption of the suit property. Accordingly, a preliminary decree was passed. Aggrieved by the same the present Appeal is filed.

The main argument of the learned Counsel for the appellants, Sri S. Srinivasa Reddy is that the Reserve Bank of India issued instructions from time to time according to which the loan for the purpose of setting up a poultry farm falls under the category of agriculture, and therefore, it is to be treated as a loan for the purpose of agriculture. If once it is a loan granted for the purpose of agriculture, in view of the judgment of the Supreme Court in Corporation Bank Vs. D.S. Gowda and Another, wherein it is held that in the case of agricultural loans/ advances the position has been made amply clear by the circulars referred to earlier which do not permit banks to charge compound interest with quarterly rests. In such cases as observed earlier, the interest can be fixed with annual rests coinciding with the time when the farmer is fluid and if thereafter the farmer fails to pay the interest it would be open to compound the interest on the crop loan or instalments upon the term loans becoming overdue. The banks are entitled for quarterly rests but interest should be calculated on annual rests. In other words, the banks are not entitled for compound rate of interest on quarterly basis. While the learned Counsel for the respondent contended that the loan is advanced for the purpose of setting up of a poultry farm. The poultry farm is considered as agriculture under the guidelines issued by the Reserve Bank of India. The Reserve Bank of India issued separate circulars determining the rate of interest in the case of poultry farms. According to the said circular, the rate of interest is 14.5% with quarterly rests. The reason for collecting the rate of interest at quarterly rests in the case of poultry farms is the borrower starts getting income within one month from the date of commencement of poultry farm. Therefore, he would be in a position to re-pay the loan along with interest. Whereas, in the case of crop loans the agriculturists do not have any regular source of income other than the sale proceeds of their crops. Therefore, when crop loans or instalments under term loans become over due, the banks can add interest outstanding to the principal. It further adds that where the default is due to genuine reasons banks should extend the period of loan or reschedule the instalments under term loan. Therefore, the observations made by the Supreme Court in D.S. Gowda''s case (1 supra) are not applicable to the loans advanced by the Bank for the purpose of poultry farms.

The question therefore is, whether the observations made by the Supreme Court in Gowda''s case (1 supra) are applicable to the loans advanced for the purpose of poultry farms.

The Supreme Court in Gowda''s case (1 supra) while considering the loan advanced for the purpose of crops held that having regard to the fact that the agriculturists are getting income only annually they should not be saddled with liability to pay the interest at quarterly rests and the banks should collect interest only on annual rests coinciding with the time when the farmer is fluid and if he fails to pay the interest it would be open to compound the interest on the crop loan or instalments upon the term loans becoming over due. However, we are of the view that the guidelines issued by the Reserve Bank of India in so far as crop loans are concerned, based on reasons namely availability of funds with the borrower. The agriculturists will get the funds only when the crop is sold in the market and in our view, that principle cannot be extended to the loans advanced for the purpose of poultry farms. In this context, we may refer to the Circular No. 17 dated 3-5-71 issued by the Reserve Bank of India. The said circular issued under the heading "Agricultural Finance". It treats the activities like poultry, fisheries, dairy farming etc. as allied activities under the agricultural sector only. In respect of these allied activities it says that there would be continuous flow of income from the sales of their products. Therefore, it would be possible for these units to repay instalments and interest at monthly/quarterly intervals. Interest on advances for allied activities should, therefore, be charged at monthly/quarterly intervals and not at half-yearly (sic. yearly) intervals as in the case of agricultural advances. The same circular is in force till today and no other circular is brought to our notice. Therefore, the reason for collecting the interest at quarterly rests, is in the case of allied activities, namely poultry farms there would be a continuous flow of income from the sales of their products. Therefore, the borrower would be in a position to repay the instalments. The reason for collecting the interest at quarterly rests is the ability or capacity of the borrower to pay the interest at quarterly rests. In our view, the principle applicable to crop loans cannot be extended to the loans advanced to poultry farms. The argument of the learned Counsel for the appellants, Sri S. Srinivasa Reddy cannot be countenanced and is rejected. The learned Judge is right in decreeing the suit at 12% p.a. with half yearly rests.

The appeal is, therefore, dismissed. No costs.