Courts need to distinguish the difference between a civil and a criminal offence. For a civil offence, the rigour of embarrassment cannot be so high as to be equated with a criminal offence

Banks led by State Bank of India (SBI) are in the practice of publishing photographs of people and public notices against companies, which have defaulted on their loan obligations. It was only last week that the union government asked banks not to publish photographs of defaulters of education loan. But what about other loan defaulters? This article is a continuation of an article previously published on this website by Vinod Kothari (Is publishing photos of home loan defaulters correct?) and takes a sharp look at the practice of name-and-shame used by banks against loan defaulters.
 

Who is a wilful defaulter?
 

A "wilful default" is deemed to have occurred if any of the following events is noted:-

a) Default in repayment obligations by the unit to the lender even when it has the capacity to honour the said obligations.
 

b) Default in repayment obligations by the unit to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
 

c) Default in repayment obligations by the unit to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
 

d) Default in repayment obligations by the unit to the lender and has also disposed off or removed the movable fixed assets or immovable property given by it for the purpose of securing a term loan without the knowledge of the bank/lender.
 

Whether a person is a wilful defaulter or not cannot be left to the arbitrary discretion of a bank because a bank will only be guided by its own self-interests. This decision is taken by a Committee which could still be biased towards banks at large. The best way to determine whether a default is wilful or not is in the civil court where a competent judge will look into all the facts and circumstances of the case and give both parties a chance to be heard. Labelling a defaulter as a wilful defaulter without giving him the right to due process is clearly a wrong practice which is giving excess authority to banking institutions.
 

Implications of being a wilful defaulter

Being a wilful defaulter has grave implications for the borrower because he is cut out from the credit sources and may be blacklisted in the financial community. A person or company would not have access to banks or capital markets for raising funds necessary for day to day operations of business and personal finance. This is extremely harsh for small and medium enterprises, traders, consumers, students and retail borrowers. In addition to this, photographs of defaulters will appear in the newspapers.
 

Are banks violating the law?

The banking secrecy laws as provided under the Reserve Bank of India (RBI) Act specifically debars lenders from parting with information on borrowers to anyone else, except to the central bank itself and that too when specifically called for under a prescribed format. However, information can be shared with the specific consent of the borrowers, which is often hard to obtain. By publishing the photographs, banks are clearly violating the bank secrecy laws.
 

Banks try to put social pressure on persons and companies by naming them as wilful defaulters and publishing their photographs. In 2006, a Madras High Court judge said: “If borrowers could find newer and newer methods to avoid repayment of the loans, the banks are also entitled to invent novel methods to recover their dues.” This leads one to think that the publication of the borrower’s photograph is a method of recovery of outstanding dues, whereas in reality the publication happens after the recovery. This is completely beyond the conscience of law. Such methods of pressure are nothing but extra legal means of obtaining recovery because there are no provisions in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI Act) that allow defaulters’ photographs to be published. There is no legal sanction for such methods. Once a default comes to the courtroom, the general public becomes aware of the same because the courtroom matters are in the public domain. For example, where a person has defaulted in payment of loan due to a lending bank, under SARFAESI Act, the lending bank after taking possession under Section 13 (2) and Section 13 (4) may issue a notice that the said property has been taken over by the lender. Once possession has been taken it is implied that the legal damage to the bank has been remedied and the individual is dispossessed. If after that, the bank issues a public notice or advertisement, then it is prima facie defamatory because this advertisement cannot be a mode of recovery. Even if the individual pays up the loan due to such embarrassment, he is still defamed in the eyes of right thinking members of the public. This is not to contend that homeowners can be allowed to walk scot-free but it is ironical that the pain of losing one’s home is not sufficient and the dispossessed person has to bear the brunt of public embarrassment, as if he is a criminal.
 

Conclusion

Both Madras High Court and Madhya Pradesh High Court favoured the publication of names in newspapers whereas the Calcutta High Court and Kerala High Court have disallowed such practices. Courts need to distinguish the difference between a civil and a criminal offence. For a civil offence, the rigour of embarrassment cannot be so high as to be equated with a criminal offence. Publishing photographs in newspapers is a violation of fundamental rights enshrined under Article 21 of the Constitution and cannot be tolerated in civilised societies. 
 

(Shambo Dey, a student of Government Law College, Mumbai, works as a Research Assistant at Vinod Kothari & Company)
 

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