DRAT Allahabad: Contractual Interest Does Not Survive Post-Recovery Suit; Tribunal Has Discretion to Award Reasonable Interest

January 5, 2026 : The Debts Recovery Appellate Tribunal (DRAT), Allahabad has reaffirmed that once a loan account is classified as a non-performing asset (NPA) and recovery proceedings are initiated, the contractual rate of interest does not automatically continue to apply. The Tribunal clarified that pendente lite and future interest are subject to judicial discretion and must be determined based on the facts and equities of each case.

The ruling came in an appeal filed by Housing and Urban Development Corporation Ltd. (HUDCO) challenging the order of the Debts Recovery Tribunal (DRT), which had reduced the rate of interest in recovery proceedings against M/s Shashi Bhusan Cold Storage Pvt. Ltd. and its guarantors.

As reflected in the judgment dated 05.01.2026 (page 1 of the PDF ), the borrower company had availed financial assistance for setting up a cold storage project, secured by personal guarantees dated 07.07.2008 and equitable mortgage over immovable properties. Upon default, the account was classified as NPA on 30.11.2010, and HUDCO filed O.A. No. 154/2012 seeking recovery of ₹2.55 crore with interest at 15.75% per annum with quarterly rests (page 2 ).

The DRT allowed the recovery claim but reduced the future interest from 15.75% to 10% simple interest from 24.07.2012 till realization. HUDCO challenged this reduction, arguing that the contractual rate should have been maintained.

However, the Appellate Tribunal noted that the DRT had provided valid reasons for reducing the interest. Specifically, it was observed that the entire sanctioned loan amount had not been disbursed in a timely manner, which resulted in the project not being completed (page 3–4 ). The Tribunal found this to be a relevant factor justifying a lower rate of interest.

Importantly, the DRAT held that once recovery proceedings are initiated, the contractual relationship governing interest effectively ceases to control future claims. It observed that interest awarded after filing of the recovery application is in the nature of compensation and must be determined judicially. The Tribunal relied on settled principles, including the discretion vested in courts under Section 34 of the Code of Civil Procedure, as also recognised by the Supreme Court in Central Bank of India v. Ravindra (page 4 ).

The Tribunal emphasized that courts and tribunals are empowered to award reasonable interest depending on the circumstances and are not bound to enforce the contractual rate post-litigation. It further held that the DRT had exercised this discretion judiciously.

Finding no infirmity in the impugned order, the DRAT dismissed the appeal and upheld the reduced rate of interest (page 5 ).

Case Details:
Housing and Urban Development Corporation Ltd. v. M/s Shashi Bhusan Cold Storage Pvt. Ltd. & Ors.
Appeal Dy. No. 574/2022 (Arising out of O.A. No. 154/2012)
Coram: Justice R.D. Khare (Chairperson)