Resort to strong arm tactics to recover loans strongly deprecated as unethical & opposed to public policy

Kerala High Court: While considering an appeal filed by a recovery agent  against a nationalised bank for payment of commission towards a loan recovery, P. B. Suresh Kumar, J. observed that the nature of agreement between the bank and the agent revealed that though the agent was authorised to follow up with the borrower for recovery of dues, the means/procedure for recovery as clarified in the agreement were indicative that the agent was free to adopt any means or procedure, even though specified as legally permissible.

The appellant claimed that the borrower had settled the loan due to the pressure it exerted  and hence it was entitled to the commission as per the agreement. The bank to refused to pay on the ground that the dues were voluntarily settled by the borrower. The lower court decreed in the agent’s favour, which was however reversed by the appellate court.

Kumar, J. observed that it is to be presumed that the bank contemplated the agent to do something more than  mere requests to the borrowers, given the clause in the agreement and the fabulous commission it offered. The agreement cautioned the agent not to do anything resulting in adverse publicity to the bank implying that the bank had authorised the agent to do everything so as to compel the borrower to pay the loan dues without resulting in adverse publicity. The agent had claimed that as per the clause in the agreement, it was authorised to pressurise the borrower for the said purpose. The Court observed that clearly an engagement of this nature is certainly to harass and intimidate the borrower, especially in the instant case where the bank has chosen a retired police officer to do the follow-up work.

The Court observed that  “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.”

Dismissing the appeal, the Court held that the agency created by the bank in the appellant’s favour for realisation of loan dues is an agreement opposed to public policy and hence, unenforceable. A copy of the judgment was directed to be forwarded to the Governor of Reserve Bank of India to ensure that mode of recovery as in the instant case is not resorted to in future by banks and other financial institutions. [Smart Security and Secret Service Agency v. State Bank of India, Regular 2016 SCC OnLine Ker 424, decided on March 30, 2016]

To read the Judgment, click HERE

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