Banks Must Verify Construction Progress Before Milestone-Linked Loan Disbursal: Supreme Court

The Supreme Court has held that where a bank undertakes to disburse loan amounts based on construction milestones, it is obligated to verify the actual progress of construction before releasing the funds.

A Bench of Justices P S Narasimha and Alok Aradhe said that deficiency in service in a complaint under the Consumer Protection Act is a matter of proof, and the burden of proving it lies initially on the person who alleges it. The Bench clarified that this burden shifts to the opposite party only after the complainant discharges the initial burden.

Apart from that, Court said that when a bank lends money to a borrower to pay a builder, the borrower cannot claim a refund of the entire amount as if he had paid it all from his own pocket. Under the principle of unjust enrichment, the refund must be limited to the amount the borrower actually paid from his own funds, so that he does not receive money that he did not personally pay.

Court was dealing with an appeal filed by Madhu Kudapa in a dispute arising from the delayed delivery of a flat booked in the residential project “Lodha Bellezza” at Kukatpally, Hyderabad, developed by M/s Lodha Healthy Constructions and Developers Private Limited (LHCPL).

The National Consumer Disputes Redressal Commission (NCDRC) had held the builder deficient in service for delaying possession. It had also found the bank deficient for failing to verify the progress of construction before disbursing loan amounts, as required under the tripartite agreement.

The NCDRC, on February 1, 2023, permitted the builder to deposit Rs 4,43,24,510 without prejudice to the rights and contentions of the parties. The amount, along with accrued interest, stood at Rs 5,65,43,411 as on October 8, 2026.

Kudapa challenged the denial of his claim for house rent and compensation, as well as the rate of interest awarded. The bank, Housing Development Corporation Ltd, challenged the direction to refund the entire amount along with interest.

Court said the borrower's entitlement to a refund had to be examined on the principle that “no one shall be enriched at the expense of another”.

It accordingly held that Kudapa was entitled to a refund of Rs 1,27,34,726, representing the amount deposited by him, along with interest at 12% per annum from the date of each deposit until payment.

Court said this approach would prevent double recovery while the borrower's liability under the loan remained in dispute.

The Bench said that where parties have expressly agreed on a specific consequence or rate of interest for breach of contract, such as delay in delivering possession, courts should generally adhere to those terms instead of departing from them on the basis of speculative calculations.

“Compensation must be based on actual loss or injury proved and cannot be used to grant a windfall gain,” the Bench said.

Applying the interest rate stipulated in the agreement between the parties, Court determined the refund payable to the borrower.

Considering the totality of the circumstances and to avoid prolonged inquiry, Court also awarded Rs 15 lakh to Kudapa as compensation. The amount would constitute full and final satisfaction of all his claims against the builder towards rent, mental agony, harassment and litigation expenses.

Court also upheld the Rs 2 lakh compensation awarded against the bank, observing that the finding of deficiency was based on the material on record and was neither perverse nor based on no evidence. It said the amount was modest and commensurate with the bank's deficiency.

Court clarified that the consumer proceedings could not determine the bank's claim under the tripartite agreement.

“The bank is entitled to recover the sum lawfully due to it from the borrower,” the Bench said, noting that the bank had already initiated recovery proceedings by filing a suit before the commercial court. The suit was dismissed and the bank's claim is now pending in appeal before the high court.

Court said the issue of the bank's recovery claim was required to be adjudicated in that appeal on its own merits.

“All contentions of the bank and the borrower, including the contention of the borrower regarding his liability under the loan, are left open,” the Bench said.

Conclusively, Court ordered the Commission to release Rs 1,27,34,726 to the borrower, along with interest at 12% per annum from the dates of the respective deposits made by him to the builder and the bank until payment.

It further directed the Commission to release Rs 15 lakh to the borrower as compensation from the deposited amount within one month.

The remaining amount was directed to be kept in an interest-bearing account and would abide by the outcome of the bank's pending appeal. The high court was directed to decide the appeal independently and without being influenced by any observations made by the Supreme Court.

Case Title: Madhu Kudapa Vs M/s Lodha Healthy Constructions And Developers Private Ltd & Anr

Bench: Justices P S Narasimha and Alok Aradhe 

Date of Judgment: October 15, 2026