Engaging Musclemen to recover loans by Banks and Financial Institutions unlawful; Kerala HC [Read Judgment]

In a democratic country having a well established independent judiciary and having various laws, if muscle men are engaged to recover dues to the Bank, there is no doubt that it will create lawlessness, said the Court

The High Court of Kerala has ruled that resorting to strong arm tactics to recover loans by Banks and other Financial Institutions is unlawful

The court was considering an appeal filed by a recovery agency against a nationalized bank [Smart security secret service agency v State Bank of India (R.S.A No:46/2011)]seeking payment of commission duty for its assistance, towards a loan recovery. It was averred that the bank refused pay the charges, after a borrower had voluntarily settled the matter. The appellant relied on the agreement clause with the bank which mandated commission duty on every recovery duty assigned to it. The lower court allowed the plea of the appellant, which was reversed the appellate court. Hence he approached the High Court.

Justice P.B Suresh Kumar who considered the appeal, observed that nature of agreement entered between the agency and bank would show that the intention of the bank was not mere authorization with the agency towards collection of loan amounts in installments. Had it been so, it could have been done by the bank themselves over telephone or otherwise. Hence by executing an agreement with the agency, it is to be reasonably presumed that the bank expected the agency to do something other than mere requests. The court further added that the engagement of this nature is certainly to harass and intimidate the borrower , more specifically in this case wherein it had hired the services of an agency manned by one Mr Balan , a retired Assistant Commissioner of Police.

The Court further opined:-“In a democratic country having a well established independent judiciary and having various laws, if muscle men are engaged to recover dues to the Bank, there is no doubt that it will create lawlessness. True, all these attempts are made on the pretext that the justice delivery system prevalent is a slow process. But, lawlessness cannot be encouraged on that ground. In a country governed by rule of law, the recovery of loans by banks and other financial institutions cannot be done otherwise than by due process of law. Taking resort to strong arm tactics is not only unlawful, but also unethical and opposed to public policy as also against protection of public interest.”

Based on the above, the court dismissed the appeal holding that the agreement was not enforceable as opposed to public policy. The court further directed that a copy of the judgment be forwarded to Governor of the Reserve Bank Of India to ensure that mode of recovery as permitted in the instant case is not resorted to in future by banks and other financial institutions.

Read the Judgment here.