The Madras High Court held that Canara Bank acted arbitrarily in imposing a 2% pre-closure penalty and retrospective processing charges on loans covered under the Emergency Credit Line Guarantee Scheme (ECLGS). The Court ruled that banks cannot override Central Government relief guidelines through internal policies and directed refund of illegally collected charges along with return of security deposit and interest.

Issue of Law

The legality of a bank imposing 2% pre-closure penalties and retrospective processing charges on loans governed by the COVID-19 relief Emergency Credit Line Guarantee Scheme (ECLGS).

Facts Referred

The petitioner, a high-rated corporate borrower, moved its credit facilities to Federal Bank for better interest rates. After paying the full dues (approx. Rs. 50.72 Crores), Canara Bank refused to release collateral securities, demanding a 2% pre-closure penalty on the GECL portion. Additionally, the bank retrospectively debited "processing fees" and "penal interest" totalling over Rs. 52 Lakhs without prior intimation. The petitioner argued these charges violated the Central Government's relief guidelines.

Judgment

The Court found the bank’s actions to be arbitrary and an abuse of fiduciary power. It noted that the GECL scheme, designed to support pandemic-hit industries, explicitly prohibited pre-payment penalties. The Court ruled that the bank's internal commercial policies cannot override the specific statutory guidelines of a government relief scheme. 

Substantive Development

The Court quashed the bank's demand and directed Canara Bank to refund Rs. 52,56,458/- to the petitioner and return the security deposit of Rs. 25,00,000/- with interest.

Read the Official Notification here