“Once a bank directs a customer to execute official documents, create mortgage charges, and undergo exhaustive administrative steps, it creates a legitimate expectation. Issuing a blanket, unreasoned rejection letter thereafter within 13 days…strongly indicates administrative arbitrariness and a lack of bona fide appraisal,” the commission said on July 17.
According to the complaint, the businessman approached HDFC Bank in September 2024 for a business loan to establish a new commercial store. While the commission accepted his allegation that the bank’s conduct amounted to deficiency in service and unfair trade practice, it declined to award the Rs 25 lakh claimed as business losses, holding that the alleged loss was speculative and unsupported by concrete evidence.
Bank sought mortgage
According to the complaint, Archit Trading Company, a sole proprietorship operating in Hamirpur district, approached HDFC Bank in September 2024 seeking a business loan of Rs 1,99,90,000 to open a new commercial store. The complainant stated that, acting on the advice of the bank’s officials, he collected the necessary land records and executed a mortgage deed in favour of the bank on October 9, 2024, and submitted all documents required for processing the loan application.
He further alleged that officials of the bank visited his business premises several times to verify stock, inspect the building and collect financial information while assuring him that the loan would be sanctioned shortly. The complainant alleged that despite completing the documentation, the bank issued a rejection letter dated October 22, 2024, declining the loan application without assigning any specific, objective or justifiable reason.
He further alleged that the rejection resulted in the proposed launch of his commercial store being postponed from January 2025 to April 2025, causing an estimated business loss of Rs 25 lakh. Besides compensation for the alleged financial loss, he also sought damages for mental harassment and litigation costs.
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The commission recorded that notices were duly served upon the opposite parties. However, they failed to file a written reply within the time period of 45 days. Thereafter, no one appeared on behalf of the bank during the hearing and the matter proceeded unilaterally.
The commission observed that the complainant’s affidavit and supporting documents, therefore, remained unchallenged and unchallenged and found no reason to disbelieve the evidence produced by him.
Bank created ‘legitimate expectation’
The commission observed that although banking institutions possess commercial discretion while evaluating loan proposals, they cannot act in an “entirely arbitrary, whimsical, and non-transparent manner.”
It noted that the complainant had asserted that bank officials instructed him to incur legal expenses by preparing a mortgage deed and assured him that the loan would be disbursed immediately before issuing an unreasoned rejection letter.
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The commission further observed that another commercial bank accepted and disbursed the same loan on the same documentation within 10 days of HDFC Bank’s rejection. It held that these circumstances “strongly indicate administrative arbitrariness and a lack of bona fide appraisal.”
“We conclude that by making the complainant execute a mortgage deed on October 9, 2024, the bank crossed the line from ‘evaluating a file’ to ‘creating a legitimate expectation of sanction’,” the commission said. On that basis, the commission held that the bank had committed deficiency in service and engaged in an unfair trade practice by causing unnecessary delays, administrative harassment and financial distress to the complainant.
The commission, however, declined to award the claimed business losses of Rs 25 lakh. It observed that although the complainant alleged that the launch of his commercial store had been delayed, the estimated loss of profits was highly speculative and was not supported by audited balance sheets or other evidence.
It, however, held that the complainant had been made to prepare mortgage documents and undergo administrative procedures before receiving a sudden rejection, making the bank liable to pay reasonable compensation for the resulting harassment and deficiency in service. Partly allowing the complaint, the district consumer commission directed the bank to jointly and severally pay Rs 40,000 as damages and compensation to the complainant. It also directed the bank to pay Rs 7,500 towards litigation costs.
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Takeaway
Banks can reject loan applications, but not arbitrarily after making borrowers complete mortgage and other formalities. If such conduct causes harassment, consumers can seek relief before a consumer commission, though claims for business losses must be backed by evidence.
Consumers facing similar grievances may contact the consumer helpline in their respective states (Himachal Pradesh: 1800–180–8087) or dial the National Consumer Helpline at 1915 for assistance.
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