The Kerala High Court held that the grant of loans by a co-operative bank to persons residing outside its service area does not, by itself, constitute criminal misconduct or misappropriation in the absence of pecuniary loss or wrongful gain. The judgment was delivered by Justice A. Badharudeen while allowing a criminal miscellaneous petition seeking quashment of a final report filed before the Enquiry Commissioner and Special Judge at Kottayam. The case originated from a complaint alleging that the Elamgulam Service Co-operative Bank had irregularly granted various loans, including Bill Discount Advances and Cash Credit facilities, in violation of its by-laws and without the requisite sanction, and that such actions formed part of a criminal conspiracy involving bank officials and certain beneficiaries. The prosecution had invoked offences under the Prevention of Corruption Act as well as provisions of the Indian Penal Code, alleging that the irregular loan disbursements amounted to misappropriation of bank funds and criminal misconduct by the accused.
A central allegation against one of the petitioners was that membership of the bank had been illegally extended to an individual who resided outside the bank’s service area, and that a loan of ₹4 lakh was granted to him as part of the alleged wrongful scheme. The High Court noted that the challenged loans had been granted only after obtaining sufficient security for their realisation in the event of default, and it was established that the petitioners had repaid the borrowed amounts in full, with the liability being closed through duly executed release deeds. In the absence of any evidence demonstrating that eligible members were denied loans so as to allow diversion of funds to outsiders, the court observed that the prosecution had not established any pecuniary loss to the bank or wrongful gain to any individual arising from the alleged conduct. The court further emphasised that even if the sanctioning of loans to persons outside the service area of a co-operative bank could be considered an improper or irregular action under the norms governing co-operative societies, such irregularity, standing alone, would not automatically attract criminal liability under the Prevention of Corruption Act or the Indian Penal Code in the absence of loss or wrongful benefit.
The High Court explained that the grant of loans to outsiders might amount to an improper action under cooperative norms, but the prosecution must demonstrate misappropriation of funds, loss to the bank, or a clear pattern of concealment to justify criminal charges. In the present case, the evidence placed before the court did not show any misuse of bank funds or any denial of loan facilities to eligible members for the benefit of the petitioners or outsiders. The loans issued were secured and fully repaid, and there was no prima facie indication of pecuniary detriment to the banking institution. The court therefore held that no prima facie case had been made out against the petitioners on the charge of criminal misconduct or misappropriation, and allowed the petition to quash the final report.
By drawing a clear distinction between regulatory non-compliance and criminal culpability, the court underlined that procedural or administrative irregularities in loan sanctioning, including extension of credit to those outside a bank’s defined service territory, do not ipso facto establish criminal misconduct where there is no demonstrable loss or wrongful gain. The ruling reflects the principle that offences under anti-corruption statutes and criminal law require evidence of dishonest intention, pecuniary loss, or unjust enrichment, and not merely an improper deviation from the norms of a cooperative institution, in order to sustain criminal proceedings against bank officials or members.
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