
State-owned banks have come together to approach the government and seek the reinstatement of their power to prevent questionable borrowers from fleeing the country. This decision was made last week by several high-street banks, as they aim to obtain a statutory backing for issuing ‘look-out circulars’ (LOCs). These circulars serve as alerts to immigration authorities and restrict defaulters from leaving the country, thereby evading local law enforcement agencies.
A senior industry official confirmed the banks’ determination to retain this tool, stating, “We have reasons to believe that it helps in loan recovery.” The primary recipients of LOCs are fraudulent borrowers and wilful defaulters who are suspected of planning to establish residency or citizenship in another country. However, the powers of issuing LOCs were recently revoked by the Bombay High Court, which deemed the authority given to bank executives as arbitrary and unreasonable. The court’s ruling did not sit well with bankers, who are eager to maintain control over such borrowers.
To address this issue, Chirag Naik, an associate partner at the law firm MZM Legal LLP, suggests either enacting a new law or amending an existing one. This would establish a statutory basis and procedure for issuing LOCs, ensuring that requests are adjudicated and processed by an independent Tribunal/Authority. Naik also proposes adopting a system inspired by blocking and tapping procedures under the Information Technology and Indian Telegraph Act.

The ability for bank heads to issue LOCs was granted in October 2018, following the Nirav Modi-Mehul Choksi scam, after requests from the finance ministry and the department of financial services. Public sector bank CEOs were added to a list of officials who could request the issuance of LOCs. This list includes officers of deputy secretary (GOI) rank or higher, joint secretaries (state government), district magistrates, superintendents of police (SP), SPs in the Central Bureau of Investigation, zonal directors in the Narcotics Control Bureau, deputy commissioners of apex tax bodies, and assistant directors of the Enforcement Directorate, among others.
The conferred power granted to banks faced criticism from certain industry associations when high-profile individuals in Corporate India discovered they were barred from flying out of the country, only finding out at the airport. Some felt that enforcement agencies extended LOCs beyond a year without sufficient grounds.
While the court ruled that banks cannot act as both judge and executioner, it also noted that the judgment does not prevent the Union of India from framing an appropriate law and establishing a procedure consistent with Article 21 of the Constitution of India.
The issuance of LOCs is governed by a home ministry letter dated September 5, 1979, which was subsequently refined to specify the seniority of officials authorized to issue LOCs and the conditions under which they can be issued. The empowerment of bank chiefs to issue LOCs came through an ‘office memorandum’ after non-performing assets (NPAs) reached alarming levels in the loan books of financial institutions, and a few prominent borrowers had already left the country.