The court verdict came as it did not accept the Reserve Bank of India's contention.
The Supreme Court has said that provision of the Banking Regulation Act, 1949, that prohibits courts from examining the reasonableness of rate of interests charged by banks, will not operate in states with debt relief laws for agriculturists.
Section 21A of the Act says that the rates of interest charged by banking companies will not be subject to scrutiny by courts on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.
"... insofar as Section 21A incidentally encroaches upon the field of relief of agricultural indebtedness, set out in Entry 30, List II, it will not operate only in states where there is a State Debt Relief Act" covering rural indebtedness, said a bench of Justice Rohinton Fali Nariman and Justice Navin Sinha in their judgment on Friday.
The Entry 30 of List II (subjects on which states alone can make laws) deals with money-lending and moneylenders; and relief of agricultural indebtedness.
In other states where the State Debt Relief Act does not apply to banks at all, the court said that Section 21 would operate.
However, in the second category of the states, if the State Debt Relief Act applies to certain financial institutions, then again Section 21A of the Banking Regulation Act will not apply in respect of the loan given to the agriculturists.
The court verdict came as it did not accept the Reserve Bank of India's contention that Section 21A falls within the central list of the subjects and even if some part of the Section 21A trench upon the debt relief laws passed by the state, the later should give way to the central law and not the other way round.
Referring to Article 246 of the Constitution and speaking for the bench, Justice Nariman said: "The constitutional provision says that when two entries in the Union List and the State List, are on a head-on collision and are irreconcilable, then, as a "last resort", the entry in the State List is to give way to the entry in the Union List. But, this is only as a last resort"
"First, it is incumbent upon the court to harmonise the entries, if possible, by giving effect to both and not rendering any one of them otiose."
Referring to the constitutional scheme of things, the court said: "insofar as agriculture is concerned, it is an exclusive State subject, with one exception -- that custody, management and disposal of property, declared by law to be evacuee property, includes agricultural land, and makes it a Concurrent subject."
Pointing out that agriculture was an exclusive state subject, the court said: "This being the case, the two entries are best harmonised by giving effect to both. This can only be done if the relief of agricultural indebtedness is to include banks, both cooperative and otherwise."
The court held that the state debt relief law came under the special entry of "relief of agricultural indebtedness", while the Banking Regulation Act came under the general entry of "banking".
In any incidental encroachment of the State Debt Relief Acts by Section 21A of the Act on the relief to agriculturists from debt, Section 21A will have to yield to the state law.
The top court verdict came on a PIL by Jayant Verma, Dr B.D. Sharma, Debabrata Biswas, Bir Singh Mahato and Dr Suneelam who assailed the constitutional validity of Section 21A of the Banking Regulation Act, 1949.
Section 21A was inserted in the Act by the Banking Laws (Amendment) Act of 1983 which came into force February 15, 1984.