HC: Public sector banks issuing LOCS ‘unguided’
MUMBAI: The Bombay high court on Tuesday struck down the power vested in public sector banks (PSBS) to issue Look Out Circulars (LOCS) against default borrowers or guarantors, calling it ‘unguided’ and ‘uncanalised’.
A division bench of justice GS Patel and justice Madhav Jamdar emphasised that the actions violated fundamental rights, particularly Article 21 (right to life and liberty) of the Indian Constitution.
They stressed that no executive action, such as an Office Memorandum (OM), could supersede the importance of legal procedures in depriving individuals of their rights.
According to the bench, “no amount of ‘public interest’ can substitute for a ‘procedure established by law’, i.e., by a statute, statutory rule or statutory regulation in the matter of deprivation of the right to life and personal liberty guaranteed under Article 21 of the Constitution of India.”
The court underscored the lack of evidence supporting the effectiveness of preventing individuals from travelling abroad in addressing debt recovery. “Not once have we been shown that preventing anyone travelling abroad has even remotely addressed the issue viz., that debt has been recovered because the person has been denied permission to travel,” the court observed.
It also questioned the rationale behind assuming that travelling abroad indicates an intention to evade financial obligations. “Is it to be assumed or presupposed that just because a borrower is travelling abroad, therefore, he/she is bound to settle abroad and flee the country,” the court questioned.
Additionally, the bench expressed concern over the absence of guidelines for public sector banks regarding LOC issuance, highlighting the potential for misuse without proper checks and balances. “There are no guidelines applied to such public sector banks. We find this particularly problematic. We have been asked simply to trust the public sector banks. We are not told whether this power to trigger a LOC can be utilized above a certain debt threshold or even for a default of a single rupee,” the court noted its apprehension.
Furthermore, the court criticised the lack of procedural fairness in the issuance of LOCS, noting the absence of notice, hearing, or disclosure of reasons to the affected individuals. This lack of transparency and opportunity to present a defense was deemed contrary to the principles of natural justice.
The ruling also addressed the issue of inequality and discrimination, as the power to issue LOCS was conferred only on public sector banks and not on private sector banks, and therefore was ‘arbitrary’ and ‘unjustifiable’.
The court, however, made it clear that its ruling should not be misconstrued as sympathetic towards defaulters. It said defaulters should not be permitted to evade their responsibilities. Highlighting the responsible behaviour of thousands and millions of borrowers from middle- and lower-income groups, who diligently repay their loans, the court noted that these individuals do not make excuses.