Major High Court Ruling on FDs: Banks Can No Longer Arbitrarily Reduce Interest Rates

The Delhi High Court has recently delivered a significant ruling regarding fixed deposits (FDs), ensuring that banks can no longer arbitrarily lower the interest rates on them. Under the ruling, banks must provide a valid reason if they wish to reduce the interest rate.

The Delhi High Court's recent decision aims to curb the arbitrary actions of banks regarding fixed deposits. The ruling states that if a fixed deposit was created under a court order, the bank cannot unilaterally reduce the interest rate; it must have a valid reason for any such reduction.

The case concerns a fixed deposit worth ₹5.89 crore, which was created under a court order during an ongoing dispute between Hero Exports and Tiffins Barytes, Asbestos & Paints Limited. NatWest Markets PLC had appealed to the court regarding this matter, but the High Court dismissed the appeal.

What is the full story?

The matter centers on the bank's arbitrary reduction of interest rates. Due to a dispute between Hero Exports and Tiffins Barytes, the High Court ordered in July 2008 that ₹8.5 crore held in Tiffins Barytes' bank accounts be secured. Of this amount, ₹5.89 crore was held with ABN Amro Bank. This bank subsequently became the Royal Bank of Scotland and later NatWest Markets PLC.

The court had ordered that the ₹5.89 crore be placed in a fixed deposit earning the highest interest rate available at the time. However, the bank later unilaterally reduced the interest rates on the FD.

Bank Reduces Interest Rate

Initially, this FD earned interest at rates of 7.75%, then 8.25%, and subsequently 7.75% again. However, effective January 30, 2018, the bank reduced the interest rate to 3.5%. Hero Exports contested this rate cut and took the matter to court.

Subsequently, in May 2019, a single judge of the High Court ordered the bank to deposit the entire amount with the High Court's Registrar General. The Court also directed that the interest payable from January 30, 2018, onwards be calculated based on the average interest rate applicable over the preceding three years. NatWest challenged this decision before a division bench (two-judge bench) of the High Court.

Bank's Clarification

In its defense, NatWest stated that under RBI regulations, commercial banks have the freedom to determine interest rates for domestic term deposits (FDs). The bank further argued that if an FD matures and is not renewed, the funds may earn interest at the savings account rate. However, the High Court did not accept these arguments.

High Court's Verdict

When the matter came before the division bench, the judges observed that there was no legal or factual error in the single judge's decision. On these grounds, the bench comprising Justice Avneesh Jhingan and Justice Shail Jain dismissed NatWest's appeal. The Court directed the bank to pay the higher interest rate on the FD worth ₹5.89 crore.