Govt weighs Bombay High Court ban on banks issuing circulars to defaulters

New Delhi, April 29

The Finance Ministry is studying the recent Bombay High Court order banning public sector banks from seeking the issuance of look out circulars, or LOCs, against wilful defaulters, sources said.

Quashing the powers granted by the Union government to public sector banks (PSBs) to act against wilful defaulters, the High Court said it is arbitrary and violative of a person’s fundamental rights.

Banks’ action went against fundamental rights

• The Bombay High Court on April 23 quashed the powers granted by the Centre to public sector banks to act against wilful defaulters, calling these violative of one’s fundamental rights
• In its 289-page judgment, a Division Bench said an executive function could not substitute a statute and the executive could not in any event contravene the Constitution

The Finance Ministry is aware of the April 26 judgement and will make a detailed assessment of the order, sources said, adding that the next course of action will be decided after studying the order.

A Division Bench on April 23 held as unconstitutional the clause of an office memorandum issued by the Central Government empowering the Chairman, Managing Directors and Chief Executive Officers of public sector banks to seek issuance of LOCs against default borrowers or even persons who stood guarantee for such borrowers. In its 289-page judgement made available on April 26, the Bench said an executive function cannot substitute a statute and the executive cannot in any event contravene the Constitution.

Commenting on the Bombay High Court order, former Financial Services Secretary D K Mittal said it is not proper on behalf of banks to seek issuance of LOC against a defaulter as it is not done after thorough investigation and that is why the High Court has termed it arbitrary.

However, he said, investigative agencies like the Central Bureau Investigation (CBI) do it after proper investigation in any matter and there are only a few wilful borrowers whose intention is not to pay.