Government has restarted process to grant power to Banks to issue Look-Out Circulars (LOC) for Defaulters
The government, in collaboration with public sector banks (PSBs), has initiated consultations with Attorney General R. Venkataramani regarding the restoration of powers to issue look-out circulars (LOCs) against defaulters. This move comes after the powers of PSBs to issue LOCs were curtailed by a recent court ruling.
Lenders’ Submissions and Anticipated Resolutions
Lenders have formally submitted their arguments in favor of reinstating these powers and remain optimistic about a swift resolution. Currently, all potential avenues are being explored, including the possibility of involving the Reserve Bank of India (RBI), the banking sector’s regulator. According to executives familiar with the matter, every possible option is under review.
Government’s Stakeholder Consultations
A bank executive disclosed that the government is actively seeking input from all relevant stakeholders before making a final decision on restoring the banks’ authority to issue LOCs. There is even consideration of the possibility of PSBs approaching the Supreme Court through the Indian Banks’ Association to advocate for the reinstatement of these powers.
RBI’s Master Direction on Wilful Defaulters
In a related development, the Reserve Bank of India (RBI) recently issued a Master Direction concerning the treatment of wilful defaulters and large defaulters. Under this directive, banks and non-banking financial companies (NBFCs) are required to examine the ‘wilful default’ aspect in all non-performing asset accounts with outstanding amounts of ₹25 lakh and above.
The Strategic Use of Look-Out Circulars (LOCs)
An executive emphasized the importance of LOCs as a deterrent tool, stating that they are used sparingly but have the potential to induce behavioral changes among borrowers. The executive further noted that the Indian Banks’ Association (IBA) has advocated for the restoration of these powers, and the government is considering amendments to the Banking Regulations Act if necessary.
Legal Challenges and Court Rulings
The Bombay High Court, in April, ruled that public sector banks (PSBs) do not have the authority to recommend or request the central government to issue LOCs against defaulting borrowers. The court declared that while the central government’s office memorandums (OMs) were not ultra vires, the subsequent empowerment of PSB managers to issue LOCs was arbitrary. The bench categorically stated, “We do not expect public sector banks to do this (issue LOCs).”
Historical Context and Recent Court Decisions
In 2018, the Ministry of Home Affairs (MHA) expanded the list of officials authorized to request LOCs to include chief executives of PSBs. However, in 2023, the Delhi High Court quashed an LOC issued by the Bank of Baroda against Nipun Singhal, a former director at Lloyd Electric and Engineering Limited. The court remarked that LOCs should not be used solely as a tool for recovering money. It observed that while existing legal remedies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, and the Insolvency and Bankruptcy Code (IBC), 2016, may be inadequate, using LOCs could provide a faster remedy for recovering money from creditors.
