Bank was liable to pay compensation to borrower as it did not verify the progress of construction before loan disbursals to builder – SC
In a recent judgment, the Hon’ble Supreme Court confirmed the award of compensation to be paid to borrower by the bank holding that the bank was deficient in service in terms of section 2(1)(g) of the Consumer Protection Act, 1986 as the bank did not verify the progress of construction before each housing loan disbursal to builder.
ABCAUS Case Law Citation:
5245 (2026) (10) abacus.in SC
In the instant case, the borrower/appellant had filed appeal under Section 23 of the Consumer Protection Act, 1986 against the order passed by the National Consumer Disputes Redressal Commission
the borrower/appellant had booked a residential apartment in a housing project. The purchase was financed partly from his savings and partly by a housing loan from the respondent bank which was disbursed directly to the builder under a tripartite arrangement.
The Builder received about 95% of the sale consideration from the Borrower as well as the Bank. Despite having received a substantial amount, there was a delay in delivery of the possession of the apartment. However, there was delay in handing over the possession of the apartment. In the meantime, the Bank started debiting pre-EMI interest on the amount disbursed by it.
The borrower filed a consumer complaint, before the Commission seeking inter alia compensation from the Builder and the Bank for mental trauma, agony and harassment.
The Commission held that there was a delay in delivery of possession of the apartment, for which the Borrower was entitled to refund of the principal amount along with reasonable interest. The Commission rejected the plea of force majeure raised by the Builder, holding that the Builder had merely narrated events and obstacles routinely faced by developers, had not intimated the Borrower of any force majeure condition at the relevant time, and had failed to show that the occupancy certificate had been received.
The Commission noticed that under the tripartite agreement and the Loan Agreement, the Bank was to disburse the loan after verifying the progress of construction. The Commission held that the Bank did not adduce any evidence of such verification, found the Bank to be deficient in service, and directed the Bank to pay a sum of Rs.2,00,000/- to the Borrower.
The Builder did not challenge the order of the Commission and sought leave to deposit the amount due under it. However, aggrieved by the finding recorded by the Commission with regard to deficiency of service on the part of the Bank and the consequential direction to pay compensation as well as the direction to refund the entire amount along with interest to the Borrower, the Bank also challenged it before the Hon’ble Supreme Court.
Before the Hon’ble Supreme Court, the borrower submitted that the loan was to be disbursed as per the schedule and in step with the construction and the Bank while disbursing the amount of loan failed to adhere to the schedule. It was contended that about 80% of the amount was disbursed at a time when the Builder did not even have permission to construct and the project was joint venture of the Bank and the Builder and they have acted in collusion.
The Hon’ble Supreme Court observed that Section 2(1)(g) of the Act defines “deficiency” as any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained under any law, or which has been undertaken to be performed in pursuance of a contract or otherwise, in relation to any service. Deficiency is a matter of proof. The burden of proving it lies on the person who alleges it. The initial burden of proving deficiency in service is on the complainant, and that the burden shifts to the opposite party only when that initial burden is discharged.
The Hon’ble Supreme Court noted that the Borrower had discharged his initial burden. He repeatedly asked the Bank to verify the progress of construction. By email he sought the Bank’s own assessment of the construction activity. he further wrote to the Builder that the progress made did not justify further payment; yet the last tranche was released. By a letter and e-mails, the borrower sought its inspection reports and an inspection by a third party. Ehen possession was due, the Builder had received about 95% of the consideration. Yet on the Bank itself reported the building to be only 90% ready, and the fire no-objection certificate came to be issued only thereafter. The burden then shifted to the Bank. Whether it verified the progress of construction before each disbursal was a fact especially within its knowledge. Although the Bank claimed that its engineers had inspected the site before each release, it produced no inspection report before the Commission.
The Hon’ble Supreme Court noted that that the thirteen tranches matched the stage-wise instalments in the Agreement for Sale, or that the Borrower forwarded the Builder’s demands, indicated only that the Bank paid what was demanded. It did not show that the Bank verified the stage of construction, as its own letter of sanction obliged it to do.
The Hon’ble Supreme Court observed that the finding of deficiency recorded by the Commission was a finding of fact founded on the material on record. It was neither perverse nor based on no evidence. The compensation of Rs. 2,00,000/- (Rupees Two Lakh only) awarded against the Bank was modest and commensurate with the deficiency.
Accordingly, the award by the Commission was upheld.
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