Bombay HC restricts power of state-run banks to issue look out circulars
In a significant ruling with far-reaching implications, the Bombay High Court has clipped the wings of state-run banks in their debt recovery efforts. The court declared as unconstitutional a government directive that empowered these banks to directly issue look out circulars.
The Controversy: Look Out Circulars and Borrower Rights
The case centered on the legal validity of a government circular issued in 2018. This circular authorized state-run banks to issue Look Out Circulars (LoCs) against loan defaulters. These LoCs essentially flagged individuals to immigration authorities, potentially preventing them from traveling abroad.
However, a number of petitions challenged this practice. The petitioners argued that the government overstepped its bounds by empowering bank managers to restrict a fundamental right – the freedom of movement. They further contended that the term “economic interest” used as a justification for LoCs was overly broad and susceptible to misuse.
The Court’s Verdict: A Balancing Act
The Bombay High Court delivered a nuanced judgment. While acknowledging the government’s legitimate interest in safeguarding the country’s economic health, the court found the specific clause empowering bank managers to issue LoCs to be unconstitutional. They deemed it an arbitrary delegation of power, lacking proper legal basis.
The court further quashed all existing LoCs issued by state-run banks against defaulters. Additionally, it directed the Bureau of Immigration to disregard any such LoCs moving forward.
Impact and Ramifications
This judgment undoubtedly weakens the debt recovery arsenal of state-run banks. It potentially emboldens loan defaulters, who may now be less apprehensive about travel restrictions. Banks will now be forced to rely on cumbersome legal channels – seeking court orders or approaching tribunals – to impose travel bans on defaulters. This process is likely to be more time-consuming and expensive.
However, the court’s ruling is not a blanket ban on travel restrictions for defaulters. It clarifies that existing court orders or those issued by tribunals regarding travel bans remain in effect. Additionally, banks retain the right to pursue legal action and seek court-mandated travel restrictions.
The Road Ahead: A More Nuanced Approach
The Bombay High Court’s decision underscores the need for a more balanced approach to debt recovery. It highlights the importance of striking a delicate equilibrium between protecting the financial interests of banks and safeguarding the fundamental rights of borrowers.
The government and banking institutions will likely need to re-evaluate their debt recovery strategies in light of this judgment. This may involve exploring alternative measures, such as stricter loan approval processes, more robust collateral requirements, and improved credit monitoring systems.
The long-term impact of this judgment remains to be seen. However, it undoubtedly injects a new layer of complexity into the already intricate world of debt recovery in India.
Also read: NCLAT restrains banks from declaring IL&FS from wilful defaulter
