Section 21A Of Banking Regulation Act Not Applicable To Agricultural Debts In States Where State Debt Relief Acts Are In Force

Section 21A of the Banking Regulation Act, 1949, which prohibits courts from re-opening any transaction between a bank and its debtor on the ground of excessive rate of interest, has been held to be not applicable to agricultural debts in States where State Debt Relief Acts are in force. This was laid down by a Supreme Court bench comprising Justice R.F Nariman and Justice Navin Sinha in a petition filed challenging the validity of Section 21A. The judgment authored by Justice R.F Nariman is highly enlightening with its rich and dense discussions on the principles of interpretation of legislative entries, legislative competence, and harmonization of entries.Argument of lack of legislative competence to enact Section 21A.The section immunes loan transactions by banks from the Usurious Loans Act, 1918 and/or any other State legislation relating to indebtedness, and then declares that no such loan transaction shall be reopened by any court on the ground of charging of excessive rates of interest. The petitioner contended that Section 21A denied protection to agricultural loans from excessive interest rates, leading to severe rural indebtedness, resulting in a total number of 2,56,913 farmers committing in India between the years 1995 to 2010.The edifice of petitioner’s case was built upon a seeming conflict between Section 21A of Banking Regulation Act and Debt Relief Acts enacted by various states. The legislative source for Banking Regulation Act is Entry 45 of List I (“banking”), whereas the State Legislature derive competency to enact Debt Relief Acts from Entry 30 of List II(“relief of agricultural indebtedness”). According to the petitioner, Section 21A of the Banking Regulation Act, to the extent it immunizes agricultural loans from judicial intervention on the ground of excessive interest, trenched upon Entry 30 of the List II. Since ‘relief to agricultural indebtedness’ was an exclusive subject for State Legislature, Parliament cannot legislate upon the same,and hence Section 21A was ultra-vires insofar as it applied to agricultural debts- this was the gist of petitioner’s argument.Pith and substance of Section 21A referable to Entry 45, List IApplying the test of “pith and substance” the Court held that Section 21A fell within the scope of Entry 45 of List I. Based on the settled principle that legislative entries should receive widest possible interpretation, it was held that entry relating to “banking” covered provisions protecting loan transactions from judicial intervention. There can be no doubt that a law relating to indebtedness of a debtor to a banking company and the interdict against a court reopening any such transaction, on the ground that interest charged by the banking company is excessive, would relate to the business of banking, the Bench explained.State Debt Relief Acts fall within List IIIt was noted that State Debt Relief Acts not only relate to scaling down of excessive rates of interest, but also, in certain cases, grant a waiver of the interest, either wholly or partially, and of the principal sum of the loan. The bench also took note of judicial precedents which settled that the whole gamut of money lending and debt-liquidation was within the State’s legislative competence ( Fatehchand Himmatlal & Ors. v. State of Maharashtra etc., (1977) 2 SCC 670 and Pathumma and Ors. v. State of Kerala and Ors. (1978) 2 SCC 1). Hence, the bench held that State Debt Relief Acts fell within Entry 30 of List II. In this regard, it is worthy to note that the Bench rejected that argument made by Centre that relief of agricultural indebtedness should be read as confined only to loans advanced by money-lenders. This argument was on the basis that the expression “relief of agricultural indebtedness” in entry 30 was preceded by the expression “money lending and money lenders”. Hence, it was argued that “relief of agricultural indebtedness” should take colour from the preceding expression and should be confined only to advances made by money lenders and not banks. Thus, it was attempted to demonstrate that there was no conflict between Section 21A and debt relief laws. However, this argument was rejected holding that the rule of noscitur a sociis, or taking colour from the former part of the entry, was not applicable for interpreting the text of constitution. It was also observed that accepting this argument meant that, a farmer would then be protected only against moneylenders, but not banks, which would denude the entry of most of its content.Harmonization of Entry 45, List I & Entry 30, List IIHaving traced the legislative source of Section 21A to Entry 45, List I and that of Debt Relief Acts to Entry 30, List II, the Court embarked upon the endeavour to harmonize the entries, following the settled law that it was incumbent upon the Court to harmonise the entries, if possible, by giving effect to both and not rendering any one of them otiose.“..indebtedness itself is only one species...

Section 21A Of Banking Regulation Act Not Applicable To Agricultural Debts In States Where State Debt Relief Acts Are In Force

Manu Sebastian

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