Government considers Bombay High Court’s prohibition on banks sending defaulter notices

According to reports, the Finance Ministry is looking at the recent ruling from the Bombay High Court prohibiting public sector banks from pursuing the issuing of lookout circulars, or LOCs, against willful defaulters.

The High Court ruled that the Union government’s authority for public sector banks (PSBs) to take willful defaulters to court should be revoked since it is capricious and violates an individual’s basic rights.

According to sources, the Finance Ministry is aware of the ruling from April 26 and will evaluate the decision in full before deciding on the next course of action.

The Central Government’s office memorandum allowing the chairman, managing directors, and chief executive officers of public sector banks to pursue the issuance of letters of credit (LOCs) against defaulting borrowers or even individuals who stood guarantee for such borrowers was declared unconstitutional by a Division Bench on April 23. The Bench said in its 289-page ruling, which was made public on April 26, that the executive branch cannot replace a law and that it cannot ever violate the Constitution.

Former Financial Services Secretary D K Mittal commented on the Bombay High Court judgment, stating that it is improper for banks to request the issuing of a Letter of Credit (LOC) against a defaulter since it is not done after a comprehensive inquiry, which is why the High Court has deemed it arbitrary.

But there are just a handful of willful borrowers who want to default, he added, and investigating organizations such as the Central Bureau examination (CBI) only take such action after conducting a thorough examination into every given case.