The Delhi High Court has held that banks cannot simply lower the interest rate on a fixed deposit maintained under a judicial direction without establishing a valid basis for the change.
The ruling came in a dispute involving NatWest Markets PLC and Hero Exports over a fixed deposit worth ₹5.89 crore, which had been created pursuant to orders passed by the High Court during arbitration proceedings.
A Division Bench comprising Justices Avneesh Jhingan and Shail Jain dismissed NatWest’s appeal against an earlier order directing the bank to pay interest at a higher rate on the deposit.
The dispute traces back to proceedings between Hero Exports and Tiffins Barrytes, Asbestos and Paints Limited. In 2008, Hero Exports approached the High Court seeking interim protection before the commencement of arbitration.
The Court subsequently directed that ₹8.5 crore belonging to Tiffins Barrytes be secured. Around ₹5.89 crore of that amount was held with ABN Amro Bank, which later became Royal Bank of Scotland and subsequently NatWest Markets PLC.
The High Court directed that the money be placed in a fixed deposit carrying the maximum applicable interest rate.
For several years, the deposit earned interest at rates of 7.75%, 8.25% and 7.75%. However, from January 30, 2018, NatWest reduced the rate to 3.5%.
The move was challenged before the High Court. In 2019, a single judge directed NatWest to deposit the entire amount with the Registrar General and ordered that interest from January 30, 2018, be calculated using the average rate applicable during the preceding three years.
NatWest argued before the Division Bench that its decision was supported by Reserve Bank of India rules allowing commercial banks to determine interest rates on domestic term deposits. The bank also contended that a fixed deposit which matured without renewal could, in certain circumstances, earn interest at the applicable savings bank rate.
The Division Bench was not persuaded.
The Court noted that although banks have discretion to determine interest rates, such discretion is not unrestricted. Banks must apply their rates without discriminating between similarly placed deposits.
NatWest, the Court found, had failed to demonstrate that comparable fixed deposits had also been brought down to the 3.5% rate.
The Bench also noted that there was no evidence that Hero Exports or Tiffins Barrytes had been told that the deposit had matured and needed to be renewed.
Another factor weighed against the bank. NatWest had approached the arbitrator in 2017 seeking permission to move the funds to another bank as it was winding down its operations, but its application did not indicate that the transfer would result in a reduction of the interest rate.
In these circumstances, the Division Bench found no legal or factual error in the single judge’s directions and rejected NatWest’s appeal.
The ruling reinforces that where a fixed deposit is maintained as part of a court-directed arrangement, a bank cannot treat the interest rate as something it may alter arbitrarily without adequate justification and notice.