Look Out Circulars and Loan Defaulters

• Context (IE): The Bombay High Court ruled that public sector banks (PSBs) cannot request Look Out Circulars (LOCs) against loan defaulters.
• The ruling quashed the centre’s Office Memoranda (OM) that empowered PSBs to issue LOCs.
• Existing restraint orders issued by competent authorities, courts, Debt Recovery Tribunals, or investigative/enforcement agencies remain unaffected by the court’s order.

Background

• LOCs were issued based on OMs from the Ministry, starting from October 27, 2010.
• In September 2018, a provision was introduced to issue LOCs if an individual’s departure posed a threat to the “economic interest” of the country.
• Later, a new clause empowered the chairperson of the State Bank of India (SBI) and CEOs of other Public Sector Banks (PSBs) to request immigration authorities to issue LOCs against default borrowers.

Reasons for quashing the Office Memoranda (OM)

• The court described these LOCs as “strong-arm tactics” to bypass legal processes. Such tactics violate fundamental rights guaranteed under Articles 14 and 21 of the IC.
• The fundamental right to travel abroad cannot be restricted by executive action without a legal basis.
• Allowing banks to act as judges and executioners violates Article 21 of the IC.
• The government failed to prove that debt had been recovered through the denial of travel permission.
• The court deemed the inclusion of only PSBs (not Private banks) in the LOC issuance to violate Article 14 of the IC and be arbitrary. It disagreed with the distinction between borrowers from PSBs and those from private banks.

About Look Out Circulars (LOCs)

• The Bureau of Immigration of the Ministry of Home Affairs (MHA) issues lookout circulars (LOCs).
• These LOCs allowed authorities at any departure port to prevent PSB debtors from leaving India.

Default borrowers include not only the borrowers but also the guarantors for repayment of loans and the principal officers or directors of corporate entities in debt.

Options for Banks After Court Ruling

• Banks are free to seek orders from courts or tribunals to restrain individuals from travelling abroad.
• Banks can also utilise powers under the Fugitive Economic Offenders Act, 2018, where applicable.