PUBLIC SECTOR BANKS (Syllabus: GS Paper 3 – Economy)

News-CRUX-10     1st May 2024        
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Context: The Bombay High Court has held that public sector banks (PSBs) cannot recommend or request the issuance of Look Out Circulars (LOCs) against loan defaulters and has set aside the provisions of the central government’s Office Memoranda (OM) that empowered PSBs to do so.


Public Sector Banks

  • Ownership Structure: Public Sector Banks (PSBs) are characterized by government ownership exceeding 50%.
  • Government Regulation: Due to government ownership, financial guidelines for PSBs are regulated by the government, instilling a sense of security among depositors.
  • Customer Base: Public sector banks typically boast a large customer base, owing to the perceived security of deposits.
  • Exemplary Case: The State Bank of India (SBI) stands as the largest public sector bank in India, with the Indian government holding more than 63% of its shares.

Legal Challenge

  • Issuing Authority: The LOCs under challenge were issued by the Bureau of Immigration of the Ministry of Home Affairs (MHA).
  • Purpose: These LOCs allowed the authorities at any port of departure to prevent a debtor to a PSB from leaving India.
  • Legal Basis: The LOCs were based on Office Memorandums (OMs) issued by the Ministry from October 27, 2010 onward.

Court's Observation

  • Critique of LOCs: The court criticized LOCs as mere strong-arm tactics to bypass legal procedures, implying they were used by public sector banks to avoid legal inconveniences.
  • Fundamental Right Upheld: The court upheld the fundamental right to travel abroad, asserting it cannot be restricted by executive actions without proper statutory provisions.
  • Criticism of Bank's Unilateral Power: The court condemned the unilateral power granted to public sector banks in matters of travel restriction, asserting it violated Article 21 rights.
  • Bank's Dual Role: The court highlighted the conflict of interest where public sector banks act as both judge and executioner in debt recovery, undermining fair legal processes.
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