Banks can't unilaterally reduce interest on fixed deposits maintained pursuant to court orders: Delhi High Court

Banks cannot unilaterally reduce interest on fixed deposits maintained pursuant to court orders without justification, the Delhi High Court recently held [Natwest Vs Hero Exports].

A bench of Justices Avneesh Jhingan and Shail Jain passed a ruling to this effect while dismissing an appeal by NatWest Markets PLC against an order requiring it to pay higher interest on a ₹5.89 crore fixed deposit that was being maintained during the pendency of an arbitration dispute.

The dispute arose between Hero Exports and Tiffins Barrytes, Asbestos and Paints Limited. Before arbitration proceedings commenced, Hero Exports moved the High Court under Section 9 of the Arbitration and Conciliation Act seeking interim protection.

In July 2008, the High Court ordered that ₹8.5 crore lying in Tiffins Barrytes' bank accounts be secured. Of this, ₹5.89 crore was lying with ABN Amro Bank, which later became Royal Bank of Scotland and is now NatWest Markets PLC.

The Court subsequently directed that the ₹5.89 crore be kept in a fixed deposit yielding the maximum rate of interest.

The deposit earned interest at rates of 7.75 percent, 8.25 percent and 7.75 percent until January 30, 2018. Thereafter, the bank reduced the interest rate to 3.5 per cent.

In May 2019, a single-judge of the High Court took exception to the reduction in the interest rate and directed the bank to deposit the entire amount with the Registrar General of the High Court. The judge further ordered that interest from January 30, 2018, should be calculated on the average of the preceding three years' rates.

NatWest challenged the order before the High Court's Division Bench, relying on an RBI circular which permits commercial banks to fix their own interest rates on domestic term deposits. It also argued that when a fixed deposit matures without renewal, the amount could attract the savings bank rate.

The Division Bench rejected the defence.

It noted that while banks were free under the RBI circular to determine rates on term deposits, that discretion was subject to the condition that there could be no discrimination between comparable deposits.

NatWest had produced no material to establish that the interest rate on all similarly placed fixed deposits had been reduced to 3.5 percent.

“The appellant neither before the learned Single Judge nor in the present appeal has substantiated the fact that the ROI for all the similar FDR was reduced to 3.5%,” the Court said.

The Court also found nothing to show that Hero Exports or Tiffins Barrytes had been informed that the fixed deposit had matured and required renewal.

Further, although NatWest had moved the arbitrator in 2017 seeking permission to transfer the amount to another bank because it was winding down its operations, the application did not disclose that the interest rate would be reduced.

Hence, the Court held that the single-judge's directions suffered from no factual or legal error, and dismissed the appeal.

NatWest was represented by advocate Sanjeev Pathak

Hero Exports was represented by advocates Shubham Seth and Nikilesh Ramachandran.

Tiffins Barrytes was represented by advocate MA Venkata Subramanian.

[Read Judgment]