Cooperative Bank Can't Recover More Than Double The Principal From Farmer-Borrowers Till Reform Committee Reports: Allahabad High Court

The Allahabad High Court has directed the Uttar Pradesh Sahkari Gram Vikas Bank Ltd. not to recover from any borrower an amount exceeding double the principal loan amount till an expert committee on cooperative banking reforms, ordered to be constituted by the Court, concludes its proceedings.

The Uttar Pradesh Sahkari Gram Vikas Bank Ltd, set up in 1959 and registered under the Sahkari Samiti Adhiniyam, 1912, functions under the Uttar Pradesh Sahkari Gram Vikas Bank Act, 1964. It is the principal provider of long-term agricultural credit in rural Uttar Pradesh and runs 323 branches. Falling outside the Banking Regulation Act, 1949, it cannot accept public deposits and borrows almost entirely from NABARD at about 8% per annum on State Government guarantee, lending on to farmers at 11.50% to 14%.

Taking cognizance of the issue in a petitions filed by farmers whose agricultural loans had multiplied several times over, Justice Vinod Diwakar held,

“It is against this backdrop that the levy of interest at the rate of 14% per annum on agricultural loans by the Bank assumes particular significance and calls for in-depth judicial examination. Such a rate of interest, being nearly three-and-a-half times the effective rate available to farmers under nationalized banking schemes, runs directly counter to the very object and purpose for which the Bank was established- namely, to support and protect the farming community by raising their social and financial status. Far from serving that purpose, the imposition of such a disproportionate financial burden upon farmers operates as an instrument of oppression, defeating the institutional mandate and rendering illusory the very promise of welfare that the Bank publicly proclaims.”

In the lead case, the petitioner had applied for a loan of Rs. 50,000/- to buy two buffaloes. It was sanctioned at 13% per annum and, following a loan agreement dated 5^th November 2009, disbursed in two instalments of Rs. 25,000/- each, repayable over five years. Land measuring 0.882 hectares in District Mahoba was mortgaged as security.

As per the Bank's counter affidavit, the petitioner repaid Rs. 3,000/- in 2010, though its later comments put the figure at Rs. 2,500/-. A One Time Settlement Scheme running till 30^th September 2022 was not availed. Recovery proceedings were initiated in 2022, a recovery certificate followed in 2025, and a notice dated 5^th January 2026 fixed the mortgaged land for auction. The auction did not take place as the petitioner moved the High Court. The outstanding by then stood at Rs. 3,49,862/-.

The Branch Manager, Kulpahar, was summoned with the original loan file and asked to explain as to why Chapter V of the U.P. Sahkari Gram Vikas Bank Rules, 1971 had not been followed, why delay on the part of Bank officials had allowed the amount to escalate, and on what basis interest at 13% had been levied. He relied on Rules 25 and 26 of the 1971 Rules.

The Court observed,

“There appeared to be absolutely no justifiable reason for permitting such an escalation. It is inconceivable, and wholly contrary to the stated objectives of the Bank as reflected in the message of its Managing Director, that a modest loan of Rs. 50,000/-, availed for the purchase of two buffaloes and secured by mortgaging land measuring 0.882 hectares, could be allowed to swell to Rs. 3,49,862/-.”

The Managing Director of the Bank and the Principal Secretary, Cooperative Department were summoned by the Court. It recorded serious dissatisfaction with the Principal Secretary's affidavit, which was silent on whether he was satisfied with the compliance already tendered and took no reasoned stand on whether cooperative banks in the State were functioning in consonance with State policy.

“..the affidavit appeared to have been filed in a routine and mechanical manner, without proper application of mind to the directions issued by this Court.”

The Court observed that the Bank's own period-wise statement of dues showed 2,74,166 borrowers in default, with outstanding principal of about Rs. 1,567.87 crore against a total outstanding, inclusive of interest, of about Rs. 7,061.22 crore. For the 24,150 borrowers in default for more than twenty years, principal of about Rs. 92.12 crore had grown to about Rs. 857.56 crore. Non-performing assets have averaged 75% over the last three years, and fresh lending has been shrinking even as loans outstanding grow.

The Court observed that the problems cooperative credit structure in the State of UP was due to political influence, poor recovery mechanisms, loan waivers, inaccurate land records, and high penal interest despite subsidized schemes.

Amongst others, the Court also noted,

“The Uttar Pradesh Cooperative Societies Act, 1965 has resulted in limited operational autonomy and significant political influence. Regulatory control is fragmented among the Registrar of Cooperative Societies, the State Government, NABARD, the Reserve Bank of India, and audit authorities, creating overlap, weak accountability, and delayed corrective action. Many cooperative institutions also lack professional boards, trained management, and modern banking expertise.”

The Court directed the Chief Secretary to constitute a committee which shall examine the loopholes through which cooperative funds, land records and member assets are being misappropriated, and whether cooperative institutions still function in the interest of their members.

On the merits, the Court held,

“the respondent-Bank is hereby directed not to recover from the borrower any amount in excess of double the principal loan amount till the proceedings of the Committee are concluded. If a request is made by the borrowers before the local branch of the Bank for payment of dues in installments, the same shall be considered sympathetically in the interest of smooth recovery of the loan.”

Case Title: Baijanth v. State of U.P. and 3 Others

Click Here To Read/Download Order