State-Owned Banks Seek Government Support to Stop Dodgy Borrowers from Fleeing

State-owned banks in India are joining forces to ask the government to give them back the power to stop fraudulent borrowers from escaping the country.

Last week, several major banks decided to make a joint request to the finance ministry. They want legal backing to issue ‘look-out circulars’ (LOCs) that alert immigration authorities and prevent unresponsive borrowers from leaving India.

“It’s a tool we don’t want to lose,” a senior industry official told ET, confirming the decision. “We believe it helps in loan recovery,” the person added. Banks use LOCs to target fraudulent borrowers and wilful defaulters who might try to flee and take up residency or citizenship in another country. However, last month, the Bombay High Court ruled that chairmen, managing directors, and CEOs of public sector banks cannot issue LOCs. The court said that the ‘right to travel abroad’ cannot be taken away by executive action, and giving this power to bank chiefs is arbitrary and unreasonable.

This ruling upset bankers, who want to retain leverage over such borrowers. According to Chirag Naik, associate partner at MZM Legal LLP, “Either a new law has to be created, or an existing one amended to give statutory backing for issuing LOCs, with a procedure handled by an independent tribunal or authority.”

Bank chiefs were first given the power to issue LOCs in October 2018, after the Nirav Modi-Mehul Choksi scam. This was in response to requests from the finance ministry and the department of financial services. The power allowed bank CEOs to request LOCs alongside other high-ranking officials.

Some industry groups criticized this power, especially after prominent corporate figures found they were barred from flying only upon reaching the airport. They argued that enforcement agencies extended LOCs without strong grounds.

The court acknowledged that banks have a financial interest in loan recovery and shouldn’t act as both judge and enforcer. However, it left room for new laws, stating that the government could still frame an appropriate law consistent with the Constitution.

The home ministry’s directive from September 5, 1979, governs the issuance of LOCs, which was adjusted to specify which senior officials could issue them and under what conditions. Bank chiefs were empowered after non-performing assets (NPAs) peaked, and some high-profile borrowers fled the country.