Banks name defaulters, but hesitate on publishing photos

Rising bad loans and restructured advances have been a major concern for Indian banking industry in the recent years. Total gross non-performing assets (NPAs) of 40 listed Indian banks rose to Rs.2.08 trillion as at end-June, up 40%, from the year ago-period. Photo: Mint

 Live mint :Manish Basu :Fri, Sep 06 2013. 12 57 AM IST

Publishing photographs is an “extra-legal means” to recover loans, according to a court verdict

What’s in a name? Not much perhaps, but a picture speaks a thousand words. Or, so it seems, when delinquent borrowers don’t take offence at their names being made public but hustle to courts to stop banks from publishing their photographs in newspaper advertisements.

Until lately, banks have been publishing photographs of people who did not repay loans. At least two high court verdicts in 2006 were in favour of this practice. But, in the wake of a conflicting verdict issued by the Calcutta high court in May, banks are now confused whether they should continue to publish photographs of delinquent clients.

In 2006, the Madras high court ruled that “if borrowers could find newer and newer methods to avoid repayment of loans, banks are also entitled to invent novel methods to recover their dues”.

The same year, the Madhya Pradesh high court concluded that publication of pictures wasn’t defamatory in any manner for delinquent borrowers.

By publishing photographs of defaulters, banks could up the ante, and recoveries improved “significantly”, said Deepak Narang, executive director at Kolkata-based United Bank of India.

The tactic was particularly effective with retail borrowers and small entrepreneurs, said the law officer of a Kolkata-based public sector bank who did not wish to be identified. But with large conglomerates, it made “little or no difference at all”, according to this person.

But the Calcutta high court formed a different view on this matter, and if it holds out against legal challenge at appeals courts, it could seriously impair loan recovery in the future, say bankers.

Even after considering the verdicts of the Madras and Madhya Pradesh high courts, which were cited by lawyers for State Bank of India, Calcutta high court judge Dipankar Dutta ruled in early May that there was no provision for publishing photographs of defaulters under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act. In his combined verdict on two similar writ petitions—both involving India’s biggest lender—Dutta said publishing photographs was an “extra-legal means” to recover loans, for which there was no “legislative sanction” under the Sarfaesi Act.

It did not matter that banks weren’t prohibited from publishing photographs, Dutta said in his judgment, adding that he could not support the view that banks were at liberty to “invent novel methods to recover their dues”.

For years, defaulters have argued that publishing their photographs was a “coercive” tactic which infringed upon a person’s right to privacy.

Whereas judges before Dutta had ruled that right to privacy wasn’t “absolute” and that banks could disclose borrowers’ identity along with their photographs in the event of delinquency, the Calcutta high court judge ruled that lenders were not allowed to adopt any means at all to recover loans unless they were clearly “authorized by law”.

After this Calcutta high court judgment, other banks such as United Bank of India and UCO Bank gave instructions to all their branches not to publish photographs of defaulters in statutory notices issued under the Sarfaesi Act.

“Banks that have been granting us loans without any complaint, cannot suddenly defame us by issuing public notices with our pictures for delays in repayment,” says Bipin Kumar Vohra, a Kolkata-based businessman who recently dragged Allahabad Bank to court for publishing his photograph in a public notice.

Such notices pointing at delinquent companies and their directors for the benefit of other potential lenders were “completely unnecessary” because they could not on their own assess creditworthiness of each firm, says Vohra, who has claimed Rs.100 crore in compensation from Allahabad Bank for defamation.

Two of Vohra’s firms collectively owe at least Rs.1,200 crore to a consortium of lenders.

Vohra, though, didn’t immediately secure any interim order as the Calcutta high court said it would hear the dispute between him and Allahabad Bank only after the division bench of the court had disposed of the appeals filed against Dutta’s judgement from May.

Rising bad loans and restructured advances have been a major concern for Indian banking industry in the recent years. Total gross non-performing assets (NPAs) of 40 listed Indian banks rose to Rs.2.08 trillion as at end-June, up 40%, from the year ago-period. Top five banks with highest NPA numbers areCentral Bank of India (6.03%) Dhanlaxmi Bank Ltd (5.78%), State Bank of Mysore (5.61%), United Bank of India (5.59%) and UCO Bank (5.58%).

Concerned over the rise in bad loans, banks had become more aggressive in recovering their dues, including making the details of promoters in public. The State Bank of India (SBI), country’s largest lender, had a major clamp down on wilful defaulters—companies that have failed to repay loans even though they have the capacity to make payments, by classifying 274 companies as wilful defaulters in the year ended 31 March, after pushing 383 into that category in the previous fiscal.

With this, SBI classified 657 companies, which have defaulted on loans worth Rs.5,700 crore as wilful defaulters in the past two years. About 60% of the defaulters are mid-size corporate firms with an average loan size of Rs.60-70 crore. SBI began compiling the wilful defaulters’ list in 1999. As at end June, SBI had gross NPAs of 5.56% of its total loans.