Bank Cannot Deny Contracted FD Interest Rate After Maturity; Promissory Estoppel Applies: Allahabad High Court
The High Court held that once the bank has promised and contracted a specific rate of interest on a Fixed Deposit Receipt, and the depositor has acted upon such representation, the bank cannot unilaterally reduce the agreed rate after issuance of the FDR, particularly when no misrepresentation is attributed to the depositor.
The Allahabad High Court has held that public sector banks cannot retrospectively reduce contracted rates of interest on Fixed Deposit Receipts (FDRs) after their issuance, especially when investors have created deposits relying upon a promised rate of return noted on the receipt itself.
The Court clarified that unilateral alteration in the agreed terms of the contract violates settled principles of law governing contractual obligations between banks and depositors.
The Court was hearing a batch of writ petitions filed under Article 226 of the Constitution, challenging the unilateral reduction of interest rates on multiple FDRs issued between 2011 and 2014 by the erstwhile Oriental Bank of Commerce, later merged with Punjab National Bank.
A Division Bench comprising Justice Ajit Kumar and Justice Swarupama Chaturvedi observed that “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”, reiterating the applicability of promissory estoppel in banking transactions.
Advocate Manish Kumar Jain appeared for the petitioners. The respondents were represented by Advocate Jainendra Kumar Mishra.
Background
The petitioners, including family members of a retired bank employee, had placed funds in multiple Fixed Deposit Receipts issued by Oriental Bank of Commerce, carrying contracted interest at the rate of 10.75% and 10.25% per annum, respectively, with ten-year maturity periods.
After the merger of Oriental Bank of Commerce into Punjab National Bank in 2020, the bank, without issuing any notice, reduced the interest rates to 9.25% and 8.25% respectively, affecting the maturity amounts payable.
The petitioners lodged several representations demanding payment of interest at the contracted rates. The bank refused, citing RBI circulars and internal clarifications governing additional staff interest benefits. The petitioners argued that the bank could not retrospectively rewrite the terms of concluded contracts after nearly a decade.
The respondents contended that a higher interest was mistakenly granted in violation of RBI guidelines, as the retired staff member was not the principal account holder in the joint deposits. It was argued that upon discovery of the error, correction was made as per regulatory norms.
Court’s Observation
The Allahabad High Court, upon hearing the matter, noted that the interest rate printed on an FDR constitutes a binding contractual term, protected by the “doctrine of legitimate expectation”, as explained by the Supreme Court in Navjyoti Co-op. Group Housing Society v. Union of India (1992) and Union of India v. Hindustan Development Corporation (1993). A depositor, the Court held, is entitled to rely upon the terms expressly recorded in writing at the time of the deposit.
The Division Bench rejected the bank’s reliance on RBI circulars relating to discretionary grant of additional staff interest benefits, holding that those provisions merely regulate eligibility and quantum of such additional benefits, and do not empower banks to revise or reduce contracted interest rates already printed on issued FDRs, nor do they operate retrospectively.
The Bench further emphasised that the bank had never alleged any fraud, irregularity, or misrepresentation by the petitioners in obtaining the FDRs, and any error in offering rates was solely attributable to the bank’s officials. In such a situation, the Court held, the bank could have recovered losses from erring employees as per internal provisions, but depositors cannot be penalised for internal oversight.
The Court also observed that even in the earlier, identical matters involving the petitioners’ family, a Coordinate Bench had already directed payment of contracted interest, and the bank had complied. Therefore, there was no justification for a contrary stand in the present petitions.
Reiterating that promissory estoppel applies to contractual banking transactions, the Bench held that the bank could not renege on its promise on the pretext of a later-issued circular, stating that “the bank cannot later on, upon maturity, deny the agreed/promised rate of interest.”
Conclusion
The petitions were allowed. The Court directed the respondent bank to compute and pay interest on the petitioners’ Fixed Deposit Receipts strictly at the originally contracted rates from their respective maturity dates.
Any deducted amount was ordered to be refunded along with interest at the applicable FDR rate until payment.
Cause Title: Nem Kumar Jain & Another v. Union of India & Ors (Neutral Citation: 2025:AHC:205020-DB)
Appearances
Petitioners: Advocate Manish Kumar Jain
Respondents: A.S.G.I., Advocate Jainendra Kumar Mishra