Central Bank of India v Ravindra

• A reference to a Constitution Bench of five Judges (Anand CJ, Thomas, Lahoti, Hegde and Variava JJ) arising from bank recovery suits. The question was whether interest charged on periodical rests and capitalised by a bank forms part of the "principal sum adjudged" under S.34 of the Code of Civil Procedure, on which pendente lite and future interest may be awarded.

1. Whether capitalised interest can be treated as principal for the purposes of S.34 CPC, and what role RBI directions play in bank interest.

• Subject to a binding contract or established banking practice, interest on loans may be charged on periodical rests and capitalised when unpaid. The principal advanced together with the capitalised interest is the principal sum adjudged on the date of suit, and is "such principal sum" on which interest pendente lite and future interest may be awarded. Penal interest cannot be capitalised. RBI directions under S.21 and S.35A of the Banking Regulation Act have statutory force, and interest charged or capitalised contrary to them must be disallowed. The plaint should aver that the interest and capitalisation follow the RBI directions.

Interest capitalised on periodical rests under a contract or established banking practice becomes part of the principal sum adjudged, on which interest pendente lite and future interest may be awarded under S.34 CPC. Penal interest cannot be capitalised. RBI directions under S.21 and S.35A of the Banking Regulation Act have statutory force, and interest charged or capitalised contrary to them must be disallowed.