Bank Ordered to Refund Processing Fees After Loan Disbursement Failure.


16 October 2024 Civil Revision >> Civil & Consumer Law   |   Consumer Protection Act >> Consumer Rights  

In a significant ruling in the matter of Axis Bank Ltd., Through Its Vice President, New Delhi v/s M/s. Sumitra D.S. Motors Pvt. Ltd., U.P. & Another., concerning consumer rights in the banking sector, the National Consumer Disputes Redressal Commission (NCDRC) has upheld orders directing a bank to refund processing fees charged for a loan that was ultimately not disbursed. The decision reinforces the principle that banks cannot retain fees for services not fully rendered, particularly when the non-disbursement is not attributable to the consumer.

The case stemmed from a dispute between a bank and two respondent companies, M/s Sumitra D.S. Motors Pvt. Ltd. and M/s Sumitra Sons, who had applied for credit facilities. The bank sanctioned loans totaling Rs. 4.5 Crores, subject to the fulfillment of certain terms and conditions, including the submission of a No Objection Certificate (NOC) from Union Bank of India (UBI), where the respondents had pre-existing mortgages on the same properties.


 

 

The respondents paid a processing fee of Rs. 4,96,350/- following the loan sanction. However, they were unable to secure the required NOC from UBI, leading to the non-disbursement of the sanctioned loan. Subsequently, the respondents sought a refund of the processing fee, which the bank refused.

Aggrieved, the respondents filed a consumer complaint before the District Consumer Disputes Redressal Forum, Shahjahanpur. The District Forum ruled in favor of the respondents, ordering the bank to refund the processing fee with interest and compensation. The State Consumer Disputes Redressal Commission, Uttar Pradesh, upheld this decision on appeal.

The bank then filed a Revision Petition before the NCDRC, arguing that the processing fee was for the sanction of the loan, which involved significant administrative and legal work, and was therefore non-refundable. They contended that the non-disbursement was due to the respondents' failure to provide the UBI NOC, not any deficiency in their service.

However, the NCDRC dismissed the bank's arguments. The commission noted the absence of any Reserve Bank of India (RBI) guidelines or the bank's internal policies explicitly stating that the processing fee was non-refundable. Furthermore, the loan agreement and sanction letters were silent on this matter.

The NCDRC emphasized that the processing fee was paid after the loan sanction, suggesting it was intended for disbursement-related services, which were not provided. The commission also pointed out that the bank's insistence on an unconditional NOC from UBI, without offering to settle the outstanding dues from the sanctioned loan amount, was unreasonable.

Citing several Supreme Court judgments, the NCDRC reiterated the limited scope of its revisional jurisdiction, which is confined to cases of jurisdictional errors or material irregularities. It found no such errors in the lower fora's orders, which were based on a fair appreciation of the evidence.

"In the absence of any specific guidelines of RBI or Bank’s own guidelines containing provisions relating to the processing fee not being refundable and the terms and conditions of the sanction in both the cases, being silent about the processing fee being non-refundable, and the Petitioner Bank insisting on a letter/NOC from the UBI with respect to mortgage of the property etc without settling their dues, we are of the considered view that on account of failure of the Bank to disburse the loan, the Petitioner Bank is not entitled to retain the processing fee charged in both the cases." the NCDRC stated in its order.

The NCDRC's decision underscores the importance of transparency and fairness in banking practices. It clarifies that banks cannot charge and retain fees for services not fully rendered, especially when the failure to provide those services is not attributable to the consumer. This ruling serves as a crucial precedent for consumer protection in financial transactions.


Section 21, Consumer Protection Act - 1986

Consumer Protection Act, 1986