In a significant relief to depositors, the Allahabad High Court has held that a bank cannot unilaterally reduce the rate of interest on Fixed Deposit Receipts (FDRs) after their issuance by citing internal circulars or guidelines retrospectively. The Division Bench of Justice Ajit Kumar and Justice Swarupama Chaturvedi ruled that the issuance of an FDR with a specified rate of interest constitutes a binding contractual obligation, and the doctrine of promissory estoppel prevents the bank from altering terms to the detriment of the depositor.
Case Background
The ruling came in the case of Nem Kumar Jain And Another v. Union Of India And 2 Others (Writ-C No. 21627 of 2023) and a connected matter. The petitioners, family members of the late P.K. Jain (a retired staff member of the Oriental Bank of Commerce, now merged with Punjab National Bank), had created multiple Fixed Deposit Receipts (FDRs) in the years 2011 and 2012. These FDRs were issued carrying interest rates of 10.75% and 10.25% per annum with maturity periods of ten years.
After the merger of the Oriental Bank of Commerce with the Punjab National Bank in 2020, the respondent bank unilaterally reduced the interest rates on these FDRs to 9.25% and 8.25%, respectively. The bank cited a circular dated July 3, 2014, and RBI guidelines, claiming that the benefit of additional interest for staff/retired staff was available only if the staff member was the “Principal Account Holder” in a joint account. Since the petitioners’ FDRs (created prior to 2014) did not meet this criteria, the bank reduced the rates.
Arguments of the Parties
The Petitioners argued that the reduction of the interest rate violated settled principles of contract law. They contended that the FDRs constituted a binding contract, and they had a legitimate expectation of receiving the matured amount at the rate expressly stipulated in the receipts. Counsel for the petitioners submitted that the circular cited by the bank could not be applied retrospectively. They further relied on a coordinate Bench judgment of the High Court in Smt. Sarojni Jain and Another v. Union of India (2023), which had allowed similar claims by the petitioner’s sister.
The Respondent Bank argued that the petitioners procured the FDRs without adhering to the due process mandated under RBI Circulars. They submitted that the father of Petitioner No. 1 had retired in 2002 and died in 2016, and Petitioner No. 1 was not dependent on him. Reliance was placed on the Master Circular dated July 1, 2009, and the bank’s internal circular of 2014. The bank contended that it had the right to “correct” the rate of interest as per the guidelines, which mandated that additional interest is allowable only if the staff member is the principal account holder.
Court’s Analysis and Observations
The Court rejected the bank’s contentions, emphasizing that the circulars relied upon were “enabling in nature” regarding the grant of additional interest but did not empower the bank to retrospectively reduce rates on existing contracts.
1. Binding Nature of Contracted Rates The Court analyzed the “Master Direction – Reserve Bank of India (Interest Rate on Deposits) Directions, 2016,” specifically Chapter II, which mandates that interest rates payable shall be strictly as per the schedule disclosed in advance and “shall not be subject to negotiation between the depositors and the bank.”
The Bench observed:
“These provisions cumulatively establish the principle that once the rate of interest is mentioned at the time of issuance of the FDR, the same cannot be unilaterally altered to the detriment of the depositor.”
2. Scope of RBI Circulars Regarding the bank’s reliance on the 2009 and 2014 circulars, the Court noted that while these documents regulated the discretionary grant of additional interest to staff, they did not contain any provision authorizing the reduction of a rate already mentioned in an issued FDR.
The Court stated:
“Nowhere does the circular authorize or contemplate the reduction of the contracted interest rate on an existing FDR. Therefore, while the circular regulates the discretionary grant of additional interest to certain categories of depositors, it does not in any manner empower the bank to unilaterally revise or reduce the interest rate already agreed and clearly mentioned in an issued FDR.”
3. Promissory Estoppel and Legitimate Expectation The Court invoked the doctrines of legitimate expectation and promissory estoppel. Citing the Supreme Court’s decisions in Navjyoti Coop. Group Housing Society v. Union of India and Union of India v. Hindustan Development Corporation, the Bench held that the bank is bound by its promise.
The Court observed:
“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.”
4. No Fault of the Depositor The Court affirmed the reasoning in the earlier Smt. Sarojni Jain judgment, noting that there was no allegation of fraud or misrepresentation by the petitioners. Even if there was an oversight by bank officials in offering a higher rate, the depositors could not be penalized years later.
The Decision
The High Court allowed the writ petitions, holding that the reduction of interest rates was “neither authorized by law nor supported by any regulatory or circular provisions.”
The Court issued the following directions:
- The respondent bank is directed to compute and pay the interest on the petitioners’ FDRs at the originally contracted rates (10.75% and 10.25% as applicable).
- Any deductions made in the interim must be paid to the petitioners along with interest thereon at the applicable FDR rate.
- The payment applies from the respective dates of maturity.
Case Details:
- Case Title: Nem Kumar Jain And Another v. Union Of India And 2 Others
- Case Number: Writ-C No. 21627 of 2023
- Bench: Justice Ajit Kumar and Justice Swarupama Chaturvedi
