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When a borrower defaults in paying instalments, the interest rate applicable to him cannot be upped by way of penalty. This view of the Kerala High Court was upheld by the Supreme Court in Kerala Financial Corporation vs C.G. Narayanan . The respondent had taken a loan at 5.5 per cent interest. The lender had in the loan document reserved for itself the right to increase the interest rate from time to time. This right was exercised by it selectively against the respondent when he defaulted on payments. This is what attracted the ire of the courts.
Lenders have the right to impose penalty and resort to other remedies such as invocation of guarantees and takeover of the mortgage property but hiking the interest rate punitively and selectively is not one of them.
(The author is a New Delhi-based chartered accountant.)
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