Public sector banks may get legal teeth on issuing lookout circulars

New Delhi: The government is likely to legally empower banks to issue lookout circulars (LOCs) to prevent loan defaulters from fleeing the country, people aware of the development told ET.

This follows a decision by the Bombay High Court earlier this week that said public sector banks (PSBs) don’t have the power to recommend, or ask, the central government for the issuance of LOCs against defaulting borrowers.

The government may now provide legal status to the office memorandum under which PSBs are allowed to issue lookout circulars. “The government is reviewing the order of the Bombay High Court. We will also be providing our inputs,” said a senior bank executive, adding that the only way to confer such powers on lenders is through amendment of existing laws.

These include the Banking Regulations Act and the Fugitive Economic Offenders Act.

In 2018, the ministry of home affairs included chief executives of PSBs on the list of officials who can seek such notices against individuals. The Bombay High Court said that while office memoranda of the central government were not ultra vires, the subsequent empowerment of bank managers of public sector banks to issue LOCs was arbitrary. “We do not expect PSBs to do this (issue LOCs),” the bench said.

Another bank executive noted that there had been initial deliberations on a common framework with a set of objective criteria that PSBs must meet before they can seek lookout circulars against defaulters. “This could involve a checklist that includes sending prior legal notices to borrowers, documenting responses and making an assessment of flight risk in conjunction with other agencies like the Central Economic Intelligence Bureau,” he said.

The Reserve Bank of India didn’t respond to queries.

The ruling may be appealed and a decision taken based on the result. “There is a view that ‘let the Supreme Court give a final verdict and accordingly a strategy may be worked out’,” said the executive cited above.

Last year, the Delhi High Court noted that banks couldn’t resort to LOCs as a measure of recovering money just because the remedies available under the Sarfaesi Act and the Insolvency and Bankruptcy Code (IBC) were not sufficient.

The court had made the observations while quashing the LOC issued at the instance of the Bank of Baroda against Nipun Singhal, a former director at Lloyd Electric and Engineering Ltd.