Order Name: HDB Financial Services Ltd Vs. M/S. Somanis & Anr.
Case No.: R.P. No. 1065/2021
The National Consumer Disputes Redressal Commission, led by AVM J. Rajendra, clarified that a business loan taken by a sole proprietor does not classify the borrower as an "individual borrower" under RBI guidelines.
Case Background
The complainants took a business loan of ₹4 crore from HDB Financial Services, agreeing to repay it over 120 monthly installments at a variable interest rate. They made 116 payments and, after an interest rate reduction, sought to repay the loan in a lump sum. They claimed the finance company initially agreed to their lump sum offer of ₹3,93,66,053.87 but later imposed a prepayment penalty of ₹17,00,851.40. The complainants argued this penalty was against RBI regulations that prohibit penalties for early repayment. They approached the District Forum to refund the prepayment fee, with 18% interest per annum, ₹2,00,000 in compensation, and ₹75,000 for litigation costs. The District Forum partially favored them, leading the finance company to appeal to the State Commission of Rajasthan. The State Commission dismissed this appeal, prompting a revision petition to the National Commission.
Arguments from the Finance Company
The finance company contended that the previous orders misunderstood the loan agreement, especially concerning prepayment charges. They pointed out that the complainant accepted these charges when signing the agreement. As the loan was for business purposes, it was exempt from RBI’s prohibition on prepayment charges for individual borrowers. They argued that the complainant, a proprietorship, wasn’t a ‘consumer’ under the relevant Act, and the complaint should have been dismissed. They explained that prepayment charges are standard to avoid potential losses, aligning with the loan agreement and RBI guidelines. The finance company believed the judgments were based on misrepresentations, overlooking the agreement’s terms and relevant regulations.
National Commission’s Observations
The National Commission noted that the loan, taken by a proprietorship, included a clear agreement to repay in 120 months, with timely installments. The key question was whether the complainant could be seen as an ‘individual borrower’ to avoid prepayment charges per RBI circulars. Referring to a Madras High Court decision, the Commission ruled a business loan by a sole proprietor doesn’t qualify as an "individual borrower" under RBI guidelines. The court stressed that the 2019 RBI circular allowed co-obligants as "individual borrowers" but didn’t extend this to sole proprietorships. Expanding this definition is RBI’s domain, not the courts, particularly regarding prepayment charge waivers in signed loan documents. Since the loan agreement explicitly included prepayment charges and was made in 2015, the 2019 RBI circular does not retroactively affect it. Thus, the commission accepted the revision petition and overturned the District Forum and State Commission’s decisions.
Takeaway
This judgment emphasizes the importance of understanding loan agreements and RBI guidelines. Business loans, even if taken by sole proprietors, may not enjoy the same protections as personal loans. It’s crucial to review and understand the terms before signing any financial agreements.
