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PSBs Cannot Request Look Out Circulars for Loan Defaulters


In a significant ruling, the Bombay High Court has declared that public sector banks (PSBs) are not permitted to request Look Out Circulars (LOCs) against loan defaulters. The court invalidated the central government’s Office Memoranda (OM) that authorized PSBs to issue LOCs, asserting that such actions violate fundamental rights guaranteed under the Constitution.


GS III: Indian Economy

Dimensions of the Article:

  1. Reasons for High Court Ruling Against Banks Restricting Debtors’ Travel
  2. Implications of the Verdict
  3. Legal Rights of Defaulters

Reasons for High Court Ruling Against Banks Restricting Debtors’ Travel:

  • Legal Framework of LOCs: LOCs, issued by the Bureau of Immigration of the Ministry of Home Affairs (MHA), were used to prevent individuals from travelling abroad if their departure was deemed harmful to the country’s “economic interest”.
  • Amendments to Office Memoranda (OM): Amendments introduced in September 2018 allowed PSB officials to request immigration authorities to issue LOCs against default borrowers, including borrowers, guarantors, and directors of corporate entities in debt.
  • Petitioners’ Arguments: Petitioners contended that the OMs violated fundamental rights, including the right to life with dignity under Article 21. They argued against the government’s classification between public and private banks, asserting that the “economic interest of India” cannot equate to the “financial interests” of a PSB.
  • Government’s Defense: The MHA argued that the circulars contained necessary “checks and balances” for deprivation of life or personal liberty, meeting legal requirements.
  • Court’s Ruling: Referring to previous cases, the court noted the failure of the government to prove debt recovery through the denial of travel permission. It criticized the use of LOCs as a means to bypass legal proceedings, emphasizing that the right to travel abroad cannot be curtailed by executive action without a government statute.
  • Concerns Raised by the Court: The court expressed concern over PSBs being granted unilateral power in debt recovery, effectively acting as judge and executioner. It found the elevation of bank officials to the same status as high-ranking police officers incomprehensible and dismissed the differentiation between PSB and private bank borrowers as arbitrary under Article 14.

Implications of the Verdict:

  • Existing Restraint Orders: The ruling does not impact existing restraint orders issued by competent authorities.
  • Limitation on Look Out Circulars (LOCs): Banks cannot request the issuance of LOCs from the central government but can still seek court orders or utilize provisions under the Fugitive Economic Offenders Act, 2018, for loan recovery.
  • Future Legislation: The judgement does not prevent the central government from enacting laws consistent with Article 21 of the Constitution.

Legal Rights of Defaulters:

  • Guidelines from RBI: The RBI directed banks and finance companies to consider compromise settlements or technical write-offs for accounts categorized as wilful defaulters or fraud.
  • Protection for Wilful Offenders: Wilful offenders or companies involved in fraud will no longer face prejudice from lenders due to ongoing criminal proceedings.
  • Cooling Period for Fresh Loans: Borrowers who have settled their debts can apply for fresh loans after a minimum cooling period of 12 months, with regulated institutions having the flexibility to stipulate longer cooling periods.
  • Legal Rights: Defaulters in India have legal rights, including the right to receive notices, fair debt collection practices, avenues for grievance redressal, access to legal assistance, and fair credit reporting.

-Source: Indian Express

May 2024