21% Interest On Friendly Loan Is Unconscionable; Courts Must Exercise Discretion Judiciously Under Section 34 CPC: Delhi High Court

"Rate of interest of 21% per annum as awarded by the Learned District Judge, is unconscionable, as the Learned District Judge while exercising discretion under Section 34 of the CPC, ought to have awarded interest as per market rates," Delhi High Court, in a significant ruling dated May 22, 2026, held that awarding an interest rate of 21% per annum on a friendly loan is arbitrary and contrary to the principles of judicial discretion.

A single-judge bench of Justice Neena Bansal Krishna observed that under Section 34 of the Code of Civil Procedure (CPC), the power of courts to award interest is a discretionary remedy that must be exercised fairly and aligned with market rates.

The dispute arose after the Plaintiffs (Respondents) rented a property from the Defendant (Appellant) and advanced a friendly loan of Rs. 12,00,000 in 2012. While the Defendant admitted the tenancy and the security deposit, she contested the loan amount and the high interest rate claimed by the Plaintiffs. The Trial Court eventually decreed the suit in favor of the Plaintiffs, awarding the recovery of the principal sum along with a steep interest rate of 21% per annum.

The primary questions before the court were whether the grant of interest at the rate of 21% per annum was legally sustainable under the CPC. The court was also called upon to determine the proper parameters for exercising judicial discretion when awarding pendente lite and future interest in the absence of a commercial contract.

Discretionary Power Under Section 34 CPC

The Court began its analysis by examining Section 34 of the CPC, which governs the grant of interest in money decrees. Justice Neena Bansal Krishna noted that a bare reading of the provision indicates that the power to award pendente lite and future interest is a discretionary power that exists independently of the contract between the parties.

"The power of Courts to award pendente lite and future interest in a Decree for payment of money, is a discretionary power, de hors the contract between the parties," the Bench observed. The Court emphasized that this discretion must be grounded in reason and not exercised in an arbitrary or fanciful manner.

Interest Rates Must Align With Equitable Considerations

Referring to the Supreme Court’s landmark judgment in Central Bank of India v. Ravindra & Ors., the Court highlighted that if a component of interest is disproportionate to the principal advanced, the court may decline to award such interest or award it at a lower rate. The Bench noted that the objective is to ensure that the interest awarded is fair to both parties.

The Court further cited the recent Supreme Court decision in Tomorrowland Limited vs. HUDCO, affirming that the power to award interest must reflect a balanced approach. The ruling emphasized that the judiciary is duty-bound to assess the specific facts of each case to ensure there is neither undue enrichment nor unfair deprivation.

"The award of interest under Section 34 CPC is a discretionary remedy, steeped in equitable consideration," the Court noted, reiterating the principles laid down in Small Industries Development Bank of India v. M/s. Sibco Investment Private Limited.

21% Interest On Friendly Loan Deemed Unconscionable

Turning to the facts of the present case, the High Court found that the loan of Rs. 12,00,000 advanced by the Plaintiffs was a "friendly loan." The Court observed that the Trial Court had failed to consider this nature of the transaction while awarding a high interest rate. The Bench held that the exercise of discretion by the District Judge was arbitrary.

The Court specifically found the 21% interest rate to be unconscionable. It noted that the Trial Court ought to have considered the market rates prevalent at the time of the judgment. Since the transaction was not strictly commercial in the traditional sense, such a high rate of interest was viewed as excessive and legally unsustainable.

Final Directions And Reduction Of Interest Rate

Consequently, the High Court intervened to modify the decree passed by the District Judge. While the recovery of the principal amount was not disturbed, the Court found it apposite to scale down the interest to a more reasonable level. The Bench concluded that a 6% interest rate would be just and fair under the circumstances.

The Court allowed the appeal in part, specifically reducing the rate of interest from 21% per annum to 6% per annum. All pending applications were disposed of in light of this modification to the original decree.

Date of Decision: 22 May 2026