Stereo. H C J D A 38.

IN THE LAHORE HIGH COURT LAHORE

JUDICIAL DEPARTMENT.
JUDGMENT:
W.P. No.23690 of 2011.
Sahibzada Faisal Ali Khan.
VERSUS
Federation of Pakistan etc.
Date of hearing.05.04.2016.
Petitioner by: Mr. Talat Farooq Sheikh Advocate
for petitioner.
Respondent by: Mr. Rehan Nawaz Advocate
for respondents.

Shams Mehmood Mirza, J:-This writ

petition calls into question the placing of the name of the
petitioner on the list of Credit Information Bureau (CIB)
maintained by State Bank of Pakistan as a defaulter of
respondent No.4.
2. Relevant facts of the case are that the petitioner availed a
finance facility from respondent No.4 for the purchase of six
Hino buses. On account of default by the petitioner in his
repayment obligations, respondent No.4 filed a suit seeking
recovery of Rs.12,897,319/-. On the contest by the petitioner, he
was granted leave to defend the suit. The said suit is still
pending adjudication before the banking court. Notwithstanding
the fact that the application for leave to defend the suit was
allowed, the petitioner’s name was placed on the CIB by the
State Bank of Pakistan. Feeling aggrieved, the petitioner filed
writ petition No.11792 of 2009 which was disposed of with a
direction to the State Bank of Pakistan to pass a decision
thereon. In the meantime, the credit card of the petitioner
obtained from Habib Bank Limited was blocked on account of
his name being on the CIB. The petitioner once again
approached this Court by filing writ petition No.23966 of 2010
which was disposed of on 10.11.2010 with a direction to the
W.P. No.23690 of 2011 ~2~

State Bank of Pakistan to hear the petitioner. As a result of the

direction given by this Court, the petitioner was afforded an
opportunity of hearing by the State Bank of Pakistan and vide
order dated 21.03.2011 his name was declined to be removed
from the CIB, hence this writ petition.
3. The learned counsel for the petitioner contended that none
of the provisions of the Banking Companies Ordinance, 1962
(the Ordinance) confer any power upon State Bank of Pakistan
to impose a penalty relating to a particular conduct of the
borrower. It was further submitted that section 25-A of the
Ordinance conferred unbridled powers upon the banks/financial
institutions to decide the status of a customer as a defaulter and
makes them a judge in their own cause. It was also the case of
the petitioner that the mechanism of CIB presupposes a default,
which is otherwise required to be proved in accordance with the
provisions of Financial Institutions (Recovery of Finances)
Ordinance, 2001 (Financial Institutions Ordinance). In
furtherance of this submission, it was stated that the questions
whether any finance exists and whether the petitioner is liable to
repay the same are required to be proved by the bank before the
banking courts constituted under the Financial Institutions
Ordinance. It was submitted that section 25-A of the Ordinance
seeks to delegate the function of making a judicial inquiry and
issue a declaration regarding the default on the part of the
customer on the financial institutions and State Bank of
Pakistan, which inquiry is essentially judicial in nature as it
involves adjudication of a lis. The petitioner placed reliance
upon a judgment reported as Messrs Yousaf Sugar Mills v. Trust
Leasing Corporation and others 2006 CLD 1191 to support his
case.
4. The learned counsel for the State Bank of Pakistan
opposed the contentions of the petitioner and stated that the
State Bank of Pakistan being one of the watchdogs of finance
and economy derives the power from the provisions of section
W.P. No.23690 of 2011 ~3~

25-A of the Ordinance to gather information from the banking

companies and financial institutions. For this purpose, CIB
database has been set up and a transparent procedure for supply
of credit information has been established. The power to call for
information and to collect data regarding the status of finance
facilities of the customers falls squarely within the statutory
ambit of the State Bank of Pakistan in order to equip the banking
companies and financial institutions to make better lending
decisions. The learned counsel for the State Bank of Pakistan
sought support for his contentions in a judgment reported as
Messrs Abdul Aziz Nawab Khan & Company v. Federation of
Pakistan, Ministry of Finance and others 2006 CLD 55 and an
unreported judgment of this Court passed in Writ Petition
No.1353 of 2014 titled M/s J.S. Developers & another v. State
Bank of Pakistan and another.
5. Certain facets of the regulatory regime introduced by the
State Bank of Pakistan over which there does not appear to be
any dispute and which are duly noted in judgments relied upon
by the parties need to be introduced at the outset.
a. The power to call for information and collect
data vests in the State Bank of Pakistan under
section 25-A of the Ordinance;
b. The CIB has been set up by the State Bank of
Pakistan to collect and assemble financial
data of the customers of the financial
institutions, which is aggregated in the
system and the said information (in the form
of credit reports) is made available on the
request of financial institutions for the
purposes of credit assessment, credit scoring
and credit risk management. The major
purpose of this database is to enable the
financial institutions to know the credit
history of their prospective customers thus
W.P. No.23690 of 2011 ~4~

enabling them to make a more prudent

decision;
c. The Non-Banking Finance Companies
(NBFC) are obliged to send the data
(information, returns and statements) of their
customers to the State Bank of Pakistan in
terms of Circular No.2 dated 21.01.2004
issued by the Securities and Exchange
Commission of Pakistan;
d. In terms of Part-II of Circular No.2 dated
21.01.2004, the NBFC’s can extend financial
facilities exceeding one million rupees to
persons whose names appear in CIB but after
recording reasons.

6. It has been noted that the State Bank of Pakistan brought

about fundamental changes in the scope of financial system in
the year 1992 by putting in place a prudent regulatory
framework by introducing Prudential Regulations. Over the
years, these Regulations have been reviewed and the latest
version covers the areas of Corporate, Small and Medium
Enterprises (SME’s) and Consumers financing. The purpose of
the Prudential Regulations is to ensure safety and soundness of
the financial system and they are applicable to banks and
Development Financial Institutions. Securities and Exchange
Commission of Pakistan has also introduced its own Prudential
Regulations for NBFC’s. The Prudential Regulations, apart from
others, provide classification of loans based on time periods at
which the repayments have not been made by the borrowers.
Apart from objective criteria (based on timeframe of the
default), subjective criteria is also used for classification of a
loan, which may include inadequate cash flow patterns of the
borrower, inadequacy of the security and other market
conditions relevant for the particular business of the borrower
etc. The criterion of classification for different loans (both short
W.P. No.23690 of 2011 ~5~

term and long term) is similar in case of corporate and SME

lending but in case of consumer lending the criteria is somewhat
different. The short term loans, under the corporate and SME
financing, are classified into “loss” category after a default
period of 1 year whereas a consumer loan is classified as “loss”
after a default period of 6 months only. It has been taken note of
that relaxations from the rigors of Prudential Regulations are
given by the State Bank of Pakistan to the customers of the
financial institutions and development financial institutions
when a specific request is made by them. The request so made
by the financial institutions and development financial
institutions is based on the following information provided to the
State Bank of Pakistan as per the Prudential Regulations.
i. Nature of Facility (funded / non-fund
based etc.)
ii. Existing Exposure
iii. Proposed Exposure
iv. Total Exposure
v. Existing Waivers
vi. Net Exposure
vii. Per Party Limit
viii. Breach

The documents that must accompany the request include

(i) Latest audited financials of the borrower along with latest un-
audited position if any; (ii) Copy of previous relaxation letters if
any; (iii) Latest CIB Report of the party; (iv) Details of
securities accepted by the bank/DFI; (v) Brief history of the
borrower’s relationship with the bank along with bank’s
recommendation in clear terms; and (vi) Any other
information/document relevant to the bank’s request.
Similarly, Regulation-5 also requires the following set of
documents (i) latest audited financials of the borrower along
with latest un-audited position if any; (ii) copy of previous
relaxation letters if any; (iii) latest CIB report of the party; (iv)
details of securities accepted by the bank/DFI; (v) brief history
of the borrower’s relationship with the bank along with bank’s
W.P. No.23690 of 2011 ~6~

recommendation in clear terms; (vi) details of financing

facilities obtained by the borrowers from other banks/DFIs; and
(vii) any other information/document relevant to the bank’s
request.
7. The State Bank of Pakistan has thus taken a whole range
of measures to regulate the financial and banking system. There
are objective and subjective criteria set up in the Prudential
Regulations to classify the loans granted by the banks and
development financial institutions. The information regarding
the loans obtained by the customers of the banks/DFI’s is
required to be sent to the State Bank of Pakistan. The main
objective of the CIB appears to be to part knowledge regarding
the classification of loans to the other banks and financial
institutions in respect of the customers who have approached
them seeking finance facilities. These measures have the
backing of sections 25 and 25-A of the Ordinance, the relevant
portions whereof read as under: -
25. Power of State Bank to control advances
by banking companies.—

(1) Whenever the State Bank is satisfied that it is

necessary or expedient in the public interest so
to do, it may determine the policy in relation to
advances to be followed by banking companies
generally or by any banking company in
particular, and, when the policy has been so
determined, all banking companies or the
banking company concerned, as the case may
be, shall be bound to follow the policy as so
determined.
(2) Without prejudice to the generality of the
power conferred by sub-section (1), the State
Bank may give directions to banking companies
either generally or to any banking company or
group of banking companies in particular.—
(a) as to the credit ceilings to be
maintained, credit targets to be achieved
W.P. No.23690 of 2011 ~7~

for different purposes, sectors and regions,

the purposes for which advances may or
may not be made, the margins to be
maintained in respect of advances, the
rates of interest, charges or mark-up to be
applied on advances and the maximum or
minimum profit sharing ratios; and
(b) prohibiting the giving of loans,
advances and credit to any borrower or
group of borrowers on the basis of interest,
either for a specific purpose or for any
purpose whatsoever; and each banking
company shall be bound to comply with any
direction so given.
(3)…………………………………………………………….
(4)…………………………………………………………….
(5)…………………………………………………………….
(6)…………………………………………………………….
25A. Power of the State Bank to collect and
furnish credit information.-

(1) Every banking company shall furnish to the State

Bank credit information in such manner as the
State Bank may specify, and the State Bank may,
either of its own motion or at the request of any
banking company, make such information
available to any banking company on payment
of such fee as the State Bank may fix from time
to time:
Provided that, while making such information
available to a banking company, the State Bank
shall not disclose the names of the banking
companies which supplied such information to
the State Bank:
Provided further that, a banking company which
proposes to enter into any financial
arrangement which is in excess of the limit laid
down in this behalf by the State Bank from time
to time shall, before entering into such financial
arrangement, obtain credit information on the
borrower from the State Bank.
(2) Any credit information furnished by the State
Bank to a banking company under sub-section
(1) shall be treated as confidential and shall not,
except for the purposes of this section or with
the prior permission of the State Bank, be
published or otherwise disclosed.
(3) No court, tribunal or other authority, including
an officer of Government shall require the State
Bank or any banking company to disclose any
W.P. No.23690 of 2011 ~8~

information furnished to, or supplied by, the

State Bank under this section.

A reading of the above provisions show that the State

Bank of Pakistan can formulate policies and give directions to
the banks/DFI’s regarding the finance facilities extended or to be
extended to their customers and can even prohibit grant of
finance facilities to any particular customer or a group of
customers and that every banking company/DFI is bound to give
credit information of its customers to the State Bank of Pakistan
which in turn can be shared with other banks and financial
institutions.
8. The credit information by the banks/other financial
institutions is based on the guidelines provided for by the
Prudential Regulations. In this regard, it may be beneficial to
reproduce Prudential Regulation No.8 (1) hereunder, which
regulation is relevant to the controversy
a) Banks/DFIs shall observe the prudential
guidelines given at Annexure-V in the matter of
classification of their asset portfolio and
provisioning there-against on time based criteria.
b) In addition to the time-based criteria prescribed
in Annexure-V, subjective evaluation of
performing and non-performing credit portfolio
shall be made for risk assessment and, where
considered necessary, any account including the
performing account will be classified, and the
category of classification determined on the basis
of time based criteria shall be further
downgraded. Such evaluation shall be carried out
on the basis of credit worthiness of the borrower,
its cash flow, operation in the account, adequacy
of the security, inclusive of its realizable value
and documentation covering the advances.
Annexure-V reads as under: -
GUIDELINES IN THE MATTER OF CLASSIFICATION
AND PROVISIONING FOR ASSETS (REGULATION R-8)
All Financing Facilities (including Short, Medium and Long Term)

Classifica Determinant Treatment of Income Provisions to be

tion made
1. Where mark-up/ Unrealized mark-up Provision of 25% of
Substand interest or /interest to be kept in the difference
ard principal is Memorandum Account resulting from the
overdue by 90 and not to be credited outstanding balance
W.P. No.23690 of 2011 ~9~

days or more to of principal less the

from the due date. Income Account except amount of liquid
when realized in cash. assets realizable
Unrealized mark without recourse to a
up/interest already Court of Law and
taken Forced Sale Value
to income account to be (FSV) of pledged
reversed and kept in stocks, plant &
Memorandum Account. machinery under
charge, and
mortgaged
residential,
commercial &
industrial
properties (land &
building only) to the
extent allowed in
Para 2 of the
Regulation R-8
2. Where mark-up/ As above Provision of 50% of
Doubtful interest or the difference
principal is resulting from the
overdue by 180 outstanding balance
days or more of principal less the
from the due date. amount of liquid
assets realizable
without recourse to a
Court of Law and FSV
of pledged stocks,
plant &
machinery under
charge, and
mortgaged
residential,
commercial &
industrial properties
(land & building only)
to the extent allowed
in Para 2 of the
Regulation R-8
3. Loss. (a) Where markup/ As above Provision of 100% of
interest or the difference
principal is resulting from the
overdue by one outstanding
year or more from balance of principal
the due date less the amount
of liquid assets
realizable without
recourse to a Court
of Law and FSV
of pledged stocks,
plant &
machinery under
charge, and
mortgaged
residential,
commercial
& industrial
properties (land &
building only) to the
extent allowed
in Para 2 of the
Regulation R-8
(b) Where Trade As above
Bills (Import/Export or As above
Inland Bills) are
not paid/adjusted
W.P. No.23690 of 2011 ~ 10 ~

within 180 days of the

due date

9. With the background knowledge about the statutory

framework put in place by the State Bank of Pakistan, the facts
of the present case may be considered. This Court in writ
petition No.23966 of 2010 directed the State Bank of Pakistan to
pass a decision on the application filed by the petitioner through
a speaking order. Complying with the directions of this Court,
the State Bank of Pakistan passed order dated 21.03.2011, which
has been impugned in this writ petition. The perusal of the said
order shows that the State Bank of Pakistan rightly did not go
into the merits of the case and confined itself to the legitimacy
of the reporting by respondent No.3 to the CIB database. The
relevant portion of the said order reads as under:-

In terms of section 25 (A) of the Banking Companies

Ordinance, 1962, it is mandatory for all banks,
Development Finance institutions (DFIs) and
Microfinance Banks (MFBs) to place entire credit
records with eCIB database. As far as date sharing
with other financial institutions is concerned, which
are being regulated by the Securities and Exchange
Commission of Pakistan (SECP), they are governed
through information sharing arrangements between
the two regulatory authorities. Being the member of
the eCIB database in a manner prescribed for the
purpose. As regard the reporting of the Complainant’s
name in the eCIB database in concerned, the
examination of all relevant record and discussion with
parties revealed that the Complainant was extended
financing facility towards lease of six Hino Buses. The
Bank is justified in reporting outstanding as well as
past overdue liabilities with specific reporting in
“Liabilities” under Litigation in eCIB reporting
database as the same stands outstanding against the
Complainant’s account. We are unable to opine about
the authenticity and validity of agreement between
the Complainant and Mr. Shahid Waseer as the same
has no significance in deciding the issue.

10. The credit report of the petitioner is placed on record by

the State Bank of Pakistan with its parawise comments as
W.P. No.23690 of 2011 ~ 11 ~

Annex R/1. The said report simply shows the outstanding dues
in terms of the requirements of Prudential Regulation-8. The
reporting requirements under section 25-A of the Ordinance, by
the banks and other financial institutions to the CIB database
thus cannot be termed as illegal or without jurisdiction. The
assertion that by placing the name of the petitioner in CIB
makes him a defaulter whereas this is the prerogative of the
banking court constituted under Financial Institutions
Ordinance has no valid basis. The information provided to CIB
database by the financial institutions in respect of a customer
does not ipso facto make him a defaulter in the eyes of law. The
determination of liability of a customer by a court of competent
jurisdiction and placing of his name in CIB database have no
nexus with each other and, therefore, ought not to be equated.
The reporting requirements by the financial institutions is
mandated by section 25-A of the Ordinance and has to be based
on the record of the financial institution. This was so held by a
learned Division bench of the learned Sindh High Court in a
judgment reported as Messrs Abdul Aziz Nawab Khan &
Company v. Federation of Pakistan, Ministry of Finance and
others 2006 CLD 55.
11. Moreover, these credit reports have no evidentiary
value and only serve the purpose of informing the other
financial institutions about the credit history of a particular
customer who intends to borrow loans/finances from the said
other financial institutions. Absent the challenge to the
constitutionality of section 25-A of the Ordinance, the reporting
requirements cannot be impugned by a customer on the ground
that a suit is pending adjudication before a court of competent
jurisdiction. The learned counsel for the petitioner did not
address any arguments on the constitutionality of section 25-A
of the Ordinance. It can furthermore also not be asserted that
passing of a decree by a court of competent jurisdiction is a sine
qua non for placing the name of the judgment debtor in CIB
W.P. No.23690 of 2011 ~ 12 ~

database. Such a contention, if accepted, would have the effect

of reading something into section 25-A of the Ordinance which
the legislature did not intend. Yousaf Sugar Mills case on which
much reliance was placed by the learned counsel for the
petitioner itself accepts as self evident the compliance of the
mandatory requirements of section 25-A of the Ordinance by
the financial institutions. The relevant passage reads as under: -
From the bare perusal of section 25 (ibid) it is evident
that State Bank of Pakistan can collect credit
information from the Banking Company only. A leasing
Company does not fall within the definition of Banking
Company. A Banking Company is under the control of
the State Bank of Pakistan while leasing Company, as
against a Banking Company, is under the control of
Securities and Exchange Commission of Pakistan. The
Securities and Exchange Commission of Pakistan has
control over all companies including the Leasing
Company and any direction by SECP is binding on the
leasing Company exactly in the same manner as the
direction of the State Bank of Pakistan is binding on
the Banking Company. The SECP can call for
information and statement from the Leasing
Companies and can collect and maintain such data
either with itself or with any other organization. The
prudential regulations for NBFCs were issued vide
Circular No.2 of 2004 bearing No.SE/NBFC/PR-2004
dated 21.01.2004, wherein it was clarified that all
NBFCs, House Building Finance Corporations and
Investment Corporation of Pakistan shall continue to
submit the return and statements etc, to SECP and
Credit Information Bureau (CIB) of State Bank of
Pakistan in the same manner and format as previously
prescribed. The regulating authority of a Leasing
Company i.e. SECP is empowered to direct for the
submission of information through prescribed returns
and statements, to State Bank of Pakistan, so as to
introduce a uniform set of regulations to improve
effective management capabilities. The information
called by SECP and submitted to State Bank of Pakistan
at the instance of SECP cannot be avoided. The State
Bank of Pakistan collects credit information from all
the banks under section 256 (ibid) while from NBFCs
on the direction of SECP and by virtue of provisions of
section 3-A of the Banking Companies Ordinance,
1962. The directions of SECP are binding in nature
W.P. No.23690 of 2011 ~ 13 ~

and there is no illegality of furnishing information by a

leasing Company to the State Bank of Pakistan.

What however tipped the balance in favour of the

petitioner in Yousaf Sugar Mills case were its peculiar facts as
an arbitration award between the parties had been announced
and payments through cheques had been made by the petitioner
therein to the leasing company which were encashed by it but
the name of the petitioner was not removed from the CIB. No
doubt, it was observed in the said judgment that an entry in the
database of CIB was akin to blacklisting a company from
entering into lawful relation with the bank for the purpose of
gain. This Court is, however, not ready to accept that placing
the name of an individual in CIB under the Prudential
Regulations and section 25-A of the Ordinance results into his
blacklisting. Such a parallel cannot be drawn in view of the
mandatory language of section 25-A of the Ordinance. As can
be seen from the Prudential Regulations of both the
banks/DFI’s and NBFC’s, the financial institutions have the
discretion of granting loans to persons whose name figure in the
CIB database by seeking exemption from the State Bank of
Pakistan on fulfillment of the conditions mentioned therein. The
availability of exemption does not justify the drawing of
parallel between placing of one’s name in CIB database with
that of blacklisting.
12. Although the learned counsel for the petitioner did not
address arguments on the constitutionality of section 25-A of
the Ordinance, it is clear that a loan from a financial institution
cannot be sought as of right. It must also be kept in mind that
the loan making process by the financial institutions is not
entirely codified or follows pre-defined rules. It is simply the
prerogative of the financial institutions to grant or not to grant a
loan to a particular borrower. Ordinarily, a financial institution
has to take into account a lot of factors while making a decision
to grant loan to a particular person. Some of the factors
W.P. No.23690 of 2011 ~ 14 ~

to be taken into account are listed in Regulation-3 and

Regulation-4 of the Prudential Regulations which prescribe,
amongst others, the following:-
a. Approval of a credit policy prescribing a minimum
current ratio and linkage between borrower’s
equity and its total financing facilities from all
financial institutions,
b. Due weightage to the credit report relating to the
borrower and its group obtained from CIB, while
considering proposals for any exposure (including
renewal, enhancement and rescheduling/
restructuring).
c. The banks/DFIs shall strictly follow their risk
management policies and credit approval criteria
and properly record reasons and justifications in
the approval form, if they decide to take exposure
on defaulters. The banks/DFIs shall ensure that CIB
report is not older than two months at the time of
approval of credit limits.
d. All exposures have to be adequately secured.
However, banks/DFI’s, in aggregate, may provide
clean financing facility in any form up to
Rs.2,000,000/- (Rupees two million only) to any
single obligor. At the time of granting a clean
facility, banks/DFIs shall obtain a written
declaration from the borrower that he has not
availed such facilities from other banks/DFI’s so as
to exceed the prescribed limit of Rs.2,000,000/- in
aggregate.
e. Banks/DFI’s shall ensure that the aggregate
exposure against all their clean facilities shall not,
at any point in time, exceed the amount of their
equity as disclosed in their latest audited financial
statements.
f. Banks/DFIs shall formulate a policy, duly approved
by their Board of Directors, about obtaining
personal guarantees of directors of private limited
companies. Banks/DFIs may, at their discretion, link
this requirement to the credit rating of the
borrower, their past experience with it or its
financial strength and operating performance.
g. Banks/DFIs shall formulate a policy, duly approved
by their Board of Directors, about obtaining
personal guarantees of directors of private limited
companies. Banks/DFIs may, at their discretion, link
this requirement to the credit rating of the
W.P. No.23690 of 2011 ~ 15 ~

borrower, their past experience with it or its

financial strength and operating performance.
h. Banks/DFIs are free to determine the margin
requirements on facilities provided by them to
their clients taking into account the risk profile of
the borrower(s) in order to secure their interests.
However, in cases where margin has been
prescribed by State Bank/Government of Pakistan,
appropriate margin shall at least be equal to the
prescribed margin.

Even if the application of a borrower meets with all the

prescribed criteria mentioned above, a financial institution
retains full discretion to disallow the same, which decision
cannot be assailed before a court of law. The decision to grant
loan is a complex process involving multiple layers. Before the
bank grants a business loan, it needs to ensure that it will be
repaid as every loan is a risk. While deciding whether or not to
grant a loan, a bank may look at (1) credit worthiness (2) gross
annual sales or revenues (3) cash flow history and projections
for the business (4) amount of money needed (5) profitability
and the length of time the applying borrower has been in
business (6) collateral available to secure the loan (6) loan
restrictions and limitation (7) the loan application and (8)
standards which the bank uses to evaluate the application. If an
applying borrower satisfies the bank with regard to his
credentials as noted above, the bank can grant loan to him
notwithstanding of his name being in the CIB database after
seeking exemption from the State Bank of Pakistan.
13. Yousaf Sugar Mills case, in the peculiar facts and
circumstances of the case, made the decision of placement of a
borrower’s name in the CIB database subject to notice. The
right of the petitioner and the obligation of the State Bank of
Pakistan have already been settled by this court in the earlier
round of litigation whereby the State Bank of Pakistan was
directed to grant a hearing to the petitioner. Pursuant to the said
direction, the petitioner was granted personal hearing by the
State Bank of Pakistan and a reasoned order has been passed.
W.P. No.23690 of 2011 ~ 16 ~

Respondent No.4 being the lender was obliged to report the

default of the petitioner in pursuance of the mechanism devised
by the State Bank of Pakistan. This Court, therefore, does not
find any violation of either the Ordinance or the Constitution in
reporting the credit record of the petitioner in CIB database.
The State Bank of Pakistan after examining the matter rightly
came to the conclusion vide order dated 21.03.2011 that the
process was duly followed by respondent No.4 and that no
violation thereof took place. The petitioner, therefore, cannot be
allowed to agitate the same subject matter in several rounds of
litigation.
14. It may be pointed out that even if the mechanism for
CIB database was not put in place by the State Bank of
Pakistan, nothing stops the banks from sharing information
about their borrowers with other banks to whom the said
borrowers have applied for a loan. In the circumstances, no
useful purpose will be served by striking down the said
mechanism which was put in place in the interest of the banking
system. It may not be out of place to mention here that the
Reserve Bank of India issued Master Circular dated 02.07.2012
whereby it has empowered the banks to given the names of
their customers who had willfully defaulted on their payment
commitments. The Master Circular also stipulated certain penal
measures against the willful defaulters, which include decision
by the banks not to grant any additional finance facilities to the
listed willful defaulters. This power to declare the borrower
“willful defaulter” was challenged before the Indian Gujrat
High Court. The challenge to Master Circular was made on
numerous grounds some of which are listed hereunder
(i) Only through legislative enactment can the
rights of the citizens be affected and not by
exercise of powers to issue directions;
(ii) The Master Circular violates due process;
(iii) The Master Circular infringes upon the
fundamental right of the citizens to carry on
W.P. No.23690 of 2011 ~ 17 ~

trader, profession and business and is,

therefore, violative of Article 19 (1) (g) of
the Indian Constitution.
(iv) The Master Circular has the penal
consequence of blacklisting the petitioner
from obtaining any new loan from banks,
which was in violation of Article 14 of the
Indian Constitution.
(v) The Master Circular cloaks judicial functions
onto the banks by delegating to them the
power to make judicial inquiry by declaring
a borrower as a willful defaulter.

While relying upon a number of judgments, the Gujrat

High Court in Special Civil Application NO. 645 of 2014 titled
Ionic Metalliks etc v. Union of India etc held that
Applying the aforenoted test, we are unable to hold
that the impugned circular amounts to impermissible
delegation of legislative power. An overall
responsibility to find out the well being of a Banking
Company, in improving monetary stability and
economic growth as well as keeping in view the
interests of depositors, the Reserve Bank of India has
to formulate its policy vis-a-vis Banking Companies.
'Banking' as defined in Section 5(b) only gives a
grammatical meaning of the transactions of a bank and
nothing more. If any management or supervision is to
be done over the banking activities of a bank, it will
have to be governed by banking policy. The 'banking
policy' and 'banking' are not independent but co-
ordinating subjects and both are covered within the
supervisory powers of the Reserve Bank of India within
the meaning of Section 35A of the Banking Regulation
Act. Even otherwise, the directions issued by the
Reserve Bank of India are in the larger interest of the
public and it being a body of experts in banking, the
directions given by it should not be lightly brushed
aside.

Repelling the argument advanced by the petitioners that

the banks cannot be allowed to judge in their own cause and
that the impugned circular was arbitrary and placed
unreasonable restriction on the borrower from getting further
loans, it was held as under:
W.P. No.23690 of 2011 ~ 18 ~

To sum up, the impugned circular does not suffer from

the vice of lack of power. It has been issued in the
interest of the banking business and is, thus, in public
interest. It seeks to ensure greater transparency and
uniformity in identification and treatment of the willful
defaulters. It targets defaulters of dues in excess of
Rs.25 lac, thus laying down the threshold limit for
application of the circular. It applies to only those
defaulters who can be categorized as "willful" as
defined in the circular. It, thus, does not cover those
borrowers who are unable to pay the debt without
there being any element of willfulness. Surely, no
borrower can claim a vested right to seek financial
assistance from a bank or a financial institution no
matter how willful or chronic his defaults in repayment
of past dues may have been. The circular, therefore, in
general terms, is not arbitrary.

The Gujrat High Court made other observations,

reproduced below, which are relevant in the present context
In respect of such matters, Parliament has vested
full discretion in the Reserve Bank and the Central
Government so that it should be open for these
authorities to decide, depending upon the
contingencies, the various alternatives or combination
of them as provided by law to ensure protection of the
interest of the depositors, the public interest and the
interest of banking policy.
…. there may be occasions and situations in which the
Legislature may, with reason, think that the
determination of an issue may be left to an expert
executive like the Reserve Bank rather than the courts
without incurring the penalty of having the law
declared void.”
….the law is well-settled that the Reserve Bank of
India, which is described as the supreme bank of the
country, is empowered to regulate the banking system
and certain regulatory functions have been assigned to
it by the provisions of the Reserve Bank of India Act,
1934 and the Banking Regulation Act, 1949. It is in
exercise of such powers that the Reserve Bank of India
has thought fit to issue the impugned Master Circular.

The ratio of the afore-mentioned judgment rendered by

the Gujrat High Court is fully applicable to the facts of the
present case even though a drastic power was allocated to the
 W.P. No.23690 of 2011 ~ 19 ~

bank and Reserve Bank of India to declare their customers as

“willful defaulters”.
15. For the foregoing reasons, this writ petition fails and is
accordingly dismissed.

(Shams Mehmood Mirza)

Judge.

Announced in open Court on 15.08.2016.

Judge.

Approved for reporting.

Judge.

*Ihsan*