Banks Can't Unilaterally Reduce Contracted Interest Rate On FDRs After Issuance Citing Internal Circulars : Allahabad High Court

A bench of Justice Ajit Kumar and Justice Swarupama Chaturvedi said that the issuance of an FDR with a specified rate constitutes a binding contractual obligation and the bank cannot retrospectively alter the terms to the detriment of the depositor by citing internal circulars or guidelines regarding staff benefits.

"In the realm of contract, principle of promissory estoppel is absolutely attracted. Once it is found that beneficiary has not made any misrepresentation and cannot be held liable for suggestio falsi or for suppressio vari, having promised a particular rate of interest upon which investor agreed to invest money by creating FDRs, the bank cannot later on upon maturity, deny the agreed/promised rate of interest", the Court held.

The ruling came on a batch of writ petitions where the petitioners challenged the decision of the respondent bank (formerly Oriental Bank of Commerce, now merged with Punjab National Bank) to reduce the interest rate on their deposits.

Briefly put, the petitioners created FDRs jointly with a retired staff member of the bank (a father or husband). At the time of issuance in 2011-2012, the FDRs clearly mentioned interest rates of 10.75% and 10.25% per annum with a maturity period of ten years.

However, years later, the bank unilaterally reduced the interest rates to 9.25% and 8.25%, respectively.

The petitioners contended that this reduction amounts to a violation of settled principles of contract law, as the issuance of the FDR with a specified rate of interest constitutes a binding contractual obligation between the parties.

The petitioners' counsel contended that their clients got legitimate expectation of receiving the matured amount at the rate expressly stipulated in the FDRs and such contractual assurance cannot be unilaterally altered by the Bank after the FDRs had been issued.

On the other hand, the bank defended its action by relying on RBI circulars and an internal circular dated July 3, 2014. The bank argued that the benefit of additional interest for staff or retired staff was available only if the staff member was the Principal Account Holder.

It argued that the FDRs in question were issued by the Bank in the year 2011- 12, during which period petitioner No.1 was not dependent upon his father, hence, the amount invested in the said FDRs had no concern with the service benefits of the petitioner's father.

It was also submitted that since the retired staff member in these cases was not the principal holder, the bank claimed the higher rate was an error and thus, it was 'correcting' the records.

It was further contended that if any FDRs issued/obtained by the petitioners beyond the provisions of the circulars issued by the RBI in pursuance of an additional rate of interest, then the respondent Bank has the right to correct the same as per circulars issued from time to time.

In this regard, the bank relied on several circulars of the Reserve Bank of India (RBI).

High Court's order

Rejecting the bank's contentions, the High Court observed that the petitioners were not informed of any illegality at the time of creating the FDRs, nor was there any allegation that the petitioners committed fraud or misrepresentation.

The Court referred to the "Master Direction - Reserve Bank of India (Interest Rate on Deposits) Directions, 2016" and other circulars relied upon by the bank and noted that all Scheduled Commercial Banks are mandated to pay interest on term deposits strictly in accordance with the schedule of interest rates disclosed in advance.

It noted that the directions made in above circular, expressly provide that such rates are non-negotiable and not amenable to individual variation.

Justice Swarupama Chaturvedi, writing for the Bench, clarified the nature of the circulars cited by the bank. The Court held:

"In our view, nothing in this clause empowers the bank to reduce a rate of interest which is already mentioned at the time of issuance of the FDR in the past. The direction regulates only the grant of additional interest in eligible cases, but it does not authorise retrospective alteration or reduction of the agreed rate of interest after the FDR has been issued".

The Court emphasized that these circulars are merely enabling in nature and they permitting banks to grant additional interest to staff at their discretion but they don't provide any authority to the Bank to unilaterally reduce the contracted rate on existing FDRs.

The Court also noted that circular No. HO/CS&P/22/2014-15/248 dated 03.07.2014, issued by the General Manager, Oriental Bank of Commerce, which provided discretionary grant of additional interest to certain categories of depositors, did not, in any manner, empower the bank to unilaterally revise or reduce the interest rate already agreed and clearly mentioned in an issued FDR.

The High Court also relied upon the Supreme Court's rulings in Navjyoti Coop. Group Housing Society v. Union of India to stress on the doctrine of legitimate expectation.

In view of this, the analysis of the relevant RBI directions, circulars and the enabling provisions relating to additional interest for bank staff, retired staff and senior citizens, the Court concluded that none of the regulatory instructions empower the respondent bank to retrospectively reduce the rate of interest already contracted in an FDR.

"The provisions relied upon by the respondents govern only the grant of discretionary additional interest and eligibility conditions therefor, however, they do not permit reduction of previously agreed rate of interest mentioned on FDR", it said.

With this, the Court affirmed that the petitioners acted on the bank's assurance and allowed their deposits to remain for the full tenure. Consequently, the bank was estopped from denying the promised rate.

"The higher rate of interest was offered at the time of issuance, and the subsequent reduction was the result of a unilateral decision by the bank officials. As held in the earlier common order dated 24.02.2023 passed in the case of Smt. Sarojni Jain (supra) and Smt. Shalini Agarwal (supra), the petitioners cannot be made to suffer for any error or oversight by the bank in offering a higher rate of interest. The same principle is squarely applicable to the present petitions", it further noted.

Therefore, allowing the writ petitions, the High Court directed the respondent bank to compute and pay the interest on the petitioners FDRs at the originally contracted rates of interest as mentioned on each FDRs, from the respective dates of maturity.

The Court further ordered that any deductions made in the interim must be paid back to the petitioners along with interest.