BEFORE:

HON’BLE MR. JUSTICE R. C. JAIN PRESIDING MEMBER

HON’BLE MR. ANUPAM DASGUPTA MEMBER

For the Complainant Mr. Praveen Swarup, Advocate

For the Opposite Parties Mr. Nitin Kala, Advocate

Dated the 17^th April, 2009

ORDER

ANUPAM DASGUPTA

The complainant is a public sector enterprise (PSE) of the Government of Maharashtra (GoM) and the opposite party (hereafter, ‘the OP’) a commercial, housing finance subsidiary of the State Bank of India (SBI), the largest public sector bank in India. Incorporated as a company under the Companies Act, 1956 and wholly owned by the GoM, the complainant is in reality a non-commercial welfare PSE, dependent almost entirely on the GoM for funds. On the strength of its equity capital and other marketable assets (if any), the complainant was at the relevant time authorised to borrow from the market to the extent of Rs. 100 crore. This was to enable it to finance its capital expenditure programmes, consisting mainly of housing and similar construction activities at various places in the State, for the welfare of the employees of the Police and Jail Departments of the GoM.

2. The facts and circumstances leading to the complaint are:

(i) In October 1993, the complainant approached the OP for a loan to finance some of its projects. After subsequent correspondence and discussion, the OP agreed to sanction a loan of Rs. 10 crore for a housing project, on the complainant furnishing equitable mortgage of the property thus created and debt-servicing guarantee of the GoM. Notably, in its attempt to expedite sanction of the loan, the complainant volunteered that it intended to seek GoM guarantee for the loan. The OP’s offer letter of 15.03.1994 to the complainant, indicating its willingness to sanction a loan of Rs. 10 crore, stipulated inter alia payment of a processing and administrative fee (hereafter, ‘the fee’) @ 2% of the amount of the loan. The letter, however, did not mention that the fee was non-refundable. The complainant paid this fee of Rs. 20 lakh, which the OP acknowledged on 23.03.1994. The OP’s detailed letter of 22.11.1994, spelling out all terms and conditions including interest @ 15.50%, also did not specify that the fee was non-refundable – in fact, all that this important letter said (vide clause 10) about the fee was, “In addition to the fees, already paid by you, you will pay or reimburse all expenses in connection with this loan…”. However, the complainant accepted the terms and conditions by signing the same letter on 20.12.1994.

(ii) Though the OP confirmed the rate of interest at 15.5% per annum in its letter of 06.02.1995, there was considerable delay on the part of the complainant in actually drawing the sanctioned loan. Because of which the OP revised some of the terms and conditions, mainly the rate of interest (17% per annum), by its letter of 25.10.1996. After further correspondence and completion of the process of documentation, the OP informed the complainant by its letter of 02.04.1997 that it would disburse the first tranche of Rs. 3 crore to the complainant only on the latter furnishing the GoM guarantee for the entire loan of 10 crore.

(iii) In the meanwhile, based on the guidelines of the Reserve Bank of India (RBI), the National Housing Bank (NHB) issued a circular letter dated 28.12.1995 to all Housing Finance Companies (HFCs). This circular observed that the term loans sanctioned by the HFCs to State Police Housing Corporations were repaid out of the States’ budgetary resources and “institutional finance in such cases has played the role of subsidising budgetary resources for creation of the infrastructure, viz., the residential quarters for staff”. It drew specific attention of the HFCs to the RBI guidelines that specifically provided inter alia, “In case of Public Sector Units, term loans/loans sanctioned by banks should be repaid out of income generated by the projects and not out of the subsidies made available to them by the Government.” This circular apparently came to the notice of the complainant sometime thereafter, though it is not clear when.

(iv) The complainant wrote to the OP under its letter of 03.11.1997 and requested reduction of the rate of interest last demanded by the OP (@ 17% per annum) as well as the fees. It cited the examples of better terms it had availed of from other financial institutions like the HUDCO Ltd. and HDFC Ltd., including processing fee @ 1% of the loan amount charged by the latter. In this letter, the complainant also sought clarification if the above-mentioned guidelines of the NHB applied to the OP. This was the first letter of the complainant seeking reduction in the rate of the fee.

(v) In its reply of 03.12.1997, the OP referred to the long delay by the complainant in fulfilling the terms of the sanction of the loan in March 1994, particularly the complainant’s inability to obtain GoM guarantee for repayment of the loan. While confirming the applicability of the NHB guidelines, the OP stated that in view of the long delay and the likely changes in project and cost parameters, it would need to re-appraise the project based on fresh data (to be obtained from the complainant when called upon to do so) and seek fresh sanction. It again enquired about the status of GoM guarantee for the loan.

(vi) Finally, by its letter of 17.06.1998, the complainant conveyed to the OP its stand that the sanction of the loan was against the guidelines of the NHB and hence ab initio invalid, rendering, in turn, the loan terms earlier accepted by the complainant also invalid and non-binding. It demanded that the OP refund the fee with interest @ 17% per annum.

3(i) We have heard the learned counsel for the parties and carefully considered the documents on record.

(ii) The central point of the complainant’s allegation of deficiency in service on the part of the OP is its contention that the OP could not have validly sanctioned and disbursed the loan in view of the NHB’s explicit guidelines of December 1995. Therefore, this fee of Rs. 20 lakh for the loan of Rs. 10 crore should be refunded with interest.

(iii) On the other hand, the OP’s stand is that the complainant accepted the loan terms (vide OP’s letter of 22.11.194, signed by the complainant on 20.12.1994). Having done so, it could not renege on the pre-requisite commitment to pay the stipulated fee at a point over four years after having accepted and paid the said fee (receipt acknowledged on 23.03.1994). The OP also emphasised that the complainant was unable to avail of the loan mainly because it could not secure the GoM guarantee for repayment of the loan.

4. It is clear from the correspondence on record that the rigour of the due diligence process and professional/administrative resources required to be deployed by the OP in examining the complainant’s loan proposal were of a minimal order. This alone can explain the OP’s insistence on GoM guarantee for repayment of the loan. Had it been otherwise, the OP would not have agreed to sanction so quickly a comparatively large loan to the complainant, which had very limited sources of own revenue and was patently dependent on the funds and/or guarantees made available by the GoM to service market debts. The short point, therefore, is that a processing fee @ 2% of the loan amount, on top of an interest rate of 17% per annum for a loan backed by GoM guarantee as well as equitable mortgage towards security of repayment, was hardly justified. We also notice that the OP did not specifically mention at any point of time that the fee was non-refundable. Further, the complainant’s contention regarding the HDFC Ltd. charging a processing fee @ 1% of the loan amount remained unrebutted. On the other hand, it reflects rather poorly on the financial management of the complainant that all these notwithstanding, it did accept the OP’s loan terms and was later unable to meet the main condition to furnish GoM guarantee.

5. Therefore, considering the totality of the situation, we feel it would meet the ends of justice if the OP refunds Rs. 10 lakh (i.e., half of the processing fee) to the complainant out of Rs. 20 lakh that it charged. Accordingly, we partly allow the complaint and direct the OP to refund to the complainant Rs. 10 lakh within four weeks from the date of this order. Given the circumstances, we are not inclined to award any interest on this refund. However, if the amount is not refunded within the period allowed, it would carry interest @ 12% per annum from the date of this order till payment The parties shall also bear their own costs.

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[R. C. JAIN, J]

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[ANUPAM DASGUPTA]